Current Purchasing Power (CPP) Method
The introduction of current purchasing power (CPP) method is one of the greatest revolutions in the field of accounting. Under current purchasing power (CPP) method, any established and approved general price index is used to convert the values of various items in the balance sheet and profit and loss account. It involves the restatement of some or all of the items in the historical financial statement for changes in the general price level. For this purpose, approved price index is used to convert the various items of historical financial statement. This method helps to present financial statement in terms of units of equal purchasing power.
Under this method, financial statements are prepared on the basis of historical cost and a supplementary statement is prepared showing historical items in terms of current value on the basis of general price index. Retail price index or wholesale price index is taken as an appropriate index for the conversion of historical cost items to show the changes in value of money. This method takes into consideration the changes in the value of items as a result of general price level, but it does not account for changes in the value of individual items.
Characteristics Of CPP Method
1. A supplementary statement is prepared and annexed to historical financial statement. The supplementary statement includes re-statement of income statement and re-stated balance sheet.
2. Any statement prepared under CPP method is based on the historical statement.
3. Consumer price index or wholesale price index is used as conversion factor for re-stated of historical items.
4. All the items in financial statement are classified into monetary and non-monetary items. Non-monetary items are adjusted, there is no need of any adjustment for the monetary items.
5. Net gain or loss account of monetary items is to be accounted in the profit and loss account.
