Accouting Theory

According to the website investorwords.com inflation is defined as:

the overall general upward price movement of goods and services in an economy, usually as measured by the Consumer Price Index and the Producer Price Index. Over time, as the cost of goods and services increase, the value of a dollar is going to fall because a person won't be able to purchase as much with that dollar as he/she previously could. While the annual rate of inflation has fluctuated greatly over the last half century, ranging from nearly zero inflation to 23% inflation, the Fed actively tries to maintain a specific rate of inflation, which is usually 2-3% but can vary depending on circumstances (2006).

During inflationary times there are several accounting methods to choose from but the best one during this time I would say is general price level adjustment. Historical cost accounting is a traditional accounting method however it does not reflect changes during inflation times. General Price level adjustment does just that it adjusts prices accordingly to the time period and the economy. “Adjustment is accomplished by taking the historical cost of an item and multiplying it by a fraction consisting of the general price index for the current period … divided by the general price index existing at the time of acquisition.” (Wolk, Dodd, & Tearney, 2004, p. 455).

Tax allocation is allotting monies to be paid for taxes. Tax allocation is based on a matching system. The taxes paid from prior year are what are allotted for the current year. They use a matching system so that net income is reported as accurately as possible. In using this system they take the income tax expense to pretax accounting income (Wolk, Dodd, & Tearney, 2004). I look at this as a form of estimated taxes, and I do feel that in the short run this can be a good predictor.

“A pension plan is an arrangement between an employer and employee for the payment of postretirement