current-cost accounting

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A form of accounting in which the approach to capital maintenance is based on maintaining the operating capability of a business. Assets are valued at their deprival value, which is the loss that a business would suffer if it were to be deprived of the use of the asset. This may be the replacement cost of the asset, its net realizable value, or its economic value to the business. Current-cost accounting ensures that a business maintains its operating capacity by separating holding gains from operating profits, thereby preventing them being distributed to shareholders. The current-cost accounting profit figure is derived by making a number of adjustments to the historical-cost accounting profit and loss account: these are the cost of sales adjustment, depreciation adjustment, monetary working-capital adjustment, and the gearing adjustment. The current-cost reserve in the balance sheet is used to ‘collect’ the current cost adjustments. This method of accounting was used widely in the UK in the late 1970s and early 1980s, when inflation was high; it was not popular, however, and as inflation has reduced it has been largely abandoned. Statement of Standard Accounting Practice 16, Current Cost Accounting, was issued in March 1980 but withdrawn in April 1988.

Subjects: Accounting.

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