Monetary Items and the Gearing Adjustment: Who really pays for Inflation? Available to Purchase

In our overview of the issues involved in inflation accounting we concentrated on two major problems, fixed assets and stock (which were analysed in depth in chapter two). We explicitly omitted any analysis of the other significant group of items in most balance sheets, monetary items; they are the liquid or near liquid assets and liabilities which a firm possesses such as cash, debtors, creditors, loan capital and so on. Agreement amongst accountants on how inflation affects monetary items is even more remote than agreement on fixed assets and stock. We have seen that the reformers of historical cost support one or other of two rival methods, current purchasing power or current cost accounting. Although the issues surrounding the treatment of monetary units are affected by whichever method is selected for the conversion of the main accounts (CPP or CCA), one cannot really polarise the discussion on monetary items so easily because, of the methods proposed so far for dealing with them, there has been a considerable element of overlap between the various treatments. This essay attempts to set down the main strands of the argument—it avoids deliberately the more esoteric topics of the debate which are explored by a few of the later contributors.