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Accounting Theory Essay

1315 words - 6 pages

Contemporary issues in Accounting
Unit Code: ACCOO106

Assignment -1
Subject: Normative accounting theory
To: Mr Khalid Mahmood

Name: Muhammad Mehedi Alam
ID: 21562675

Word count: 1145(reference excluded)
Date of Submission-07/12/09
Normative accounting theories
CPPA- current/constant purchasing power accounting
CCA- current cost accounting
CoCoA- continuous contemporary accounting
Current purchasing power accounting a form of accounting that measures profit after allowing for the maintenance of the purchasing power of the shareholders' capital. ‘There are various prescriptive theories of accounting that were advanced by various people on the basis that historical ...view middle of the document...

Deductive process:
‘A resource controlled by an entity as a result of past transaction and from which future economic benefits are expected to flow to the entity.’- [IAS framework paragraph 49(a)]
Deductive process is recognition of a dispute must be based on the precision of the property. For an example , if opening residual value of an equity was $ 66,000 and the price index increased from 136 to 139, the capital maintenance should be calculated as $66,000*3/136=$14559. Deduction of this amount ,a capital maintenance form the nominal difference between opening and closing capitals, would give the net increment in purchasing power, the real income of a period.
Net monetary gain or loss
In the deductive process, assets need to be revalued and calculate the net monetary loss or gain from holding monetary items when they choose the CPPA model and measure financial capital maintenance in units of current purchasing power. CPPA separately considers monetary items and non-monetary items. Monetary items are those assets and liabilities that remain fixed in terms of their monetary value regardless of changes in the purchasing power of money. Equally, the monetary equivalent of non-monetary items will be expected to change over time because of factors such as inflation. In undertaking current purchasing power accounting adjustments are made to the book value of non-monetary items, generally by way of a general price index. The carrying value of monetary items, however, is not adjusted.
Purchasing power
The view is that if an entity holds a monetary asset, such as cash, and if there is a general decrease in the purchasing power of money, then that cash will buy less: it will suffer from a purchasing power loss. With non-monetary assets, it is assumed that the assets will retain their equivalent purchasing power. For example, if an entity holds land that costs $10000 and inflation has been recorded at 5% then the adjusted value of the land might be shown as $10500 and if this land was sold then it is assumed that the cash received would have the same purchasing power. Although the monetary equivalent of the land has increased, no gain or loss would be recognized. By comparison, $10 in cash held now is still worth $10 in cash 2 years later, but its purchasing power would have declined and this reduction in purchasing power would be recognized in determining the entity’s financial performance.
Criticism:
Performing current purchase power adjustments
When applying CPPA, all adjustments are done at the end of the period, with the adjustments being applied to accounts prepared under the historical cost convention.
a. Non-monetary assets can be defined as those assets whose monetary equivalents will change over times because of inflation, and would include such things as plant and equipment and inventory.
b. It is stressed that under CPPA, no change in the purchase power of entity is assumed to arise because of holding...

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