Prices do not remain constant over a period of time. They tend to change due to various economic, social or political factors. Changes in the price levels cause two types of economic conditions, inflation and deflation. Inflation may be defined as a period of general increase in the prices of factors of production whereas deflation may fall in the general price level. These changes in the price levels lead to inaccurate presentation of financial statements which otherwise are prepared to present a true and fair view of the company’s financial health. This is so because the financial statements are prepared on historical costs on the assumption that the unit of account. Accounting for price level changes is a system of maintaining accounts in which all items in financial statements are recorded at current values. This system of accounting ascertains profit or loss and presents financial position of the business on the basis of current prices. Accounting for price level changes is also called inflation accounting.
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