Monetary Working Capital Adjustment (MWCA)

Monetary Working Capital Adjustment: Definition Working capital is the part of a company’s capital that is needed to meet the day-to-day expenses of the business, as well as to hold the current assets required for normal operations. It is referred to as the excess of current assets over current liabilities. Changes in price levels disturb … Read more

Backlog Depreciation

Backlog Depreciation: Definition Whenever an asset is revalued, the profit on revaluation is transferred to the revaluation reserve account. However, the revaluation also gives rise to backlog depreciation. This backlog depreciation should be charged to the revaluation reserve account. The concept of backlog depreciation is illustrated in the next section. Formula to Calculate Backlog Depreciation … Read more

Calculation of Depreciation Adjustment Under the Current Cost Accounting Technique

In current cost accounting (CCA), assets are shown in the balance sheet at the current replacement costs after allowing for depreciation. This also requires an adjustment for depreciation. Formula Use the following formula to calculate the current year’s depreciation under CCA: To calculate the depreciation adjustment, the following formula can be used: Depreciation adjustment = … Read more

Current Value Accounting Technique

Under the current value accounting method, all assets and liabilities are shown in the balance sheet at their current values. The difference in the value of net assets at the start and end of the year is known either as profit or loss. Significantly, determining current values is not a straightforward task. Example Horizon Ltd. … Read more

Replacement Cost Accounting Technique (RCA)

Replacement Cost Accounting Technique (RCA) is an improvement over current purchase power (CPP) as it suffers from the that it does not take into the individual price index related to the particular assets of a company. The RCA technique uses the index directly relevant to the companies individual assets and not the general price index. … Read more

Merits and Demerits of Inflation Accounting

High inflation results in more profits and greater financial difficulties. Dividends and income taxes are paid on increased profit, calculated on the basis of historical cost concept. Therefore, changing from the historical cost concept to price level or inflation accounting is recommended. This ensures that the correct profit is shown, as well as a true … Read more

Limitations of Historical Cost Accounting

The limitations of historical cost accounting include: 1. Failure to disclose the current worth of the enterprise The accounts presented using historical cost accounting do not show many effects that are due to the inflation gap. Thus, a true and fair view is not given. 2. Uncomparable items in financial statements Sometimes, due to inflation, certain … Read more

Dividend Policy

Meanings of Dividend Dividend is the payment to shareholders in lieu of their share capital. It is that portion of profits of a Company which is distributable among its shareholders according to the resolution passed in the meeting of Directors. This may be a fix percentage on the share capital or at fixed per share. … Read more