Current Cost Profit Measurement As It Affects Coporate Capital
Most users of accounts tend to make mental adjustments to figures in historical cost accounts to allow for the effects of inflation on the values of transactions. This subjective approach leads to different users getting different views from a given set of accounts. The historical cost concept of accounting has ignored or has not provided for any feasible measures for reflecting the dynamic nature of business transactions, viz-a-viz changing prices. In times of inflation, profits measured on historical cost terms are only sufficient to maintain operating assets in monetary terms and not to preserve and maintain the level they should be in real terms. The existence of inflation in our economy therefore calls for an alternative to historical cost method of accounting for transaction carried out at a particular time. The Current Cost Accounting (CCA) has as a basic principle that operating profits should only be measured after the capital of the firm has been maintained. This study critically evaluates the impact on corporate capital of current cost accounting profit given. The prevailing economic circumstances with respect to inflation. The study repeals that financial statements prepared on historical cost basis are misleading during periods of inflation while the application of current cost basis ensures the maintenance of corporate capital.