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    CCA Current Cost Accounting Theory 2021

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    Pradeep
    1. Current cost accounting (CCA) adjusts historical costs to account for changes in the general price level over time. Key adjustments under CCA include depreciation, cost of sales, monetary working capital, and gearing. 2. Depreciation adjustment accounts for the difference between depreciation calculated using replacement costs under CCA versus historical costs under historical cost accounting. Cost of sales adjustment matches current revenue with the current cost of goods sold. 3. Monetary working capital adjustment provides additional working capital needed due to price inflation. Gearing adjustment accounts for assets financed partially by fixed-rate borrowing whose real value changes with inflation.

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    CCA Current Cost Accounting Theory 2021

    Uploaded by

    Pradeep
    804 views4 pages
    1. Current cost accounting (CCA) adjusts historical costs to account for changes in the general price level over time. Key adjustments under CCA include depreciation, cost of sales, monetary working capital, and gearing. 2. Depreciation adjustment accounts for the difference between depreciation calculated using replacement costs under CCA versus historical costs under historical cost accounting. Cost of sales adjustment matches current revenue with the current cost of goods sold. 3. Monetary working capital adjustment provides additional working capital needed due to price inflation. Gearing adjustment accounts for assets financed partially by fixed-rate borrowing whose real value changes with inflation.

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    Mcom notes Inflation accounting

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    CCA Current cost Accounting theory 2021

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    1. Current cost accounting (CCA) adjusts historical costs to account for changes in the general price level over time. Key adjustments under CCA include depreciation, cost of sales, monetary working capital, and gearing. 2. Depreciation adjustment accounts for the difference between depreciation calculated using replacement costs under CCA versus historical costs under historical cost accounting. Cost of sales adjustment matches current revenue with the current cost of goods sold. 3. Monetary working capital adjustment provides additional working capital needed due to price inflation. Gearing adjustment accounts for assets financed partially by fixed-rate borrowing whose real value changes with inflation.

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    Download as docx, pdf, or txt
    804 views4 pages

    CCA Current Cost Accounting Theory 2021

    Uploaded by

    Pradeep
    1. Current cost accounting (CCA) adjusts historical costs to account for changes in the general price level over time. Key adjustments under CCA include depreciation, cost of sales, monetary working capital, and gearing. 2. Depreciation adjustment accounts for the difference between depreciation calculated using replacement costs under CCA versus historical costs under historical cost accounting. Cost of sales adjustment matches current revenue with the current cost of goods sold. 3. Monetary working capital adjustment provides additional working capital needed due to price inflation. Gearing adjustment accounts for assets financed partially by fixed-rate borrowing whose real value changes with inflation.

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    of 4

    GFGC HEBRI PG I MCOM AFA 2021

    Current cost Accounting (CCA)


    CPP method is based on changes in the value of all the items in general. It uses general price index for
    restatement of historical cost values in items of current purchasing power.CPP does not consider specific
    price changes of the individual items.
    It should be noted that price changes related to individual items may not be according to general price
    changes. Therefore, to overcome this problem a method has been developed in 1975 by a committee
    headed by Prof.Francis Sandiland. The method called current cost accounting method.
    Adjustment to be made in CCA method (For calculating current cost operating profit )
    1. Depreciation adjustment
    2. Cost of sales adjustment (COSA )
    3. Monetory working capital adjustment (MWCA )
    4. Gearing Adjustment
    In addition there will be an Adjustment related to Disposal of Fixed Asset

    1. Depreciation Adjustment : Under CCA the replacement cost of the asset is considered for
    depreciation calculation but under HCA the gross asset value is considered for depreciation calculation.
    Because of this there is a difference between depreciation calculated as per CCA and as per HCA approach.
    It means depreciation as per HCA is comparatively lesser than depreciate as per CCA . To adjust this
    depreciation adjustment need to be done .

    Depreciation adjustment = Dep. As per CCA – Dep. As per HCA


    Note : Dep. As per CCA may be calculated based on ‘Replacement cost’ or ‘Average replacement cost ‘.
    Additional depreciation
    Whenever the depreciation is calculated based average replacement cost under CCA, there may
    be need of calculating additional depreciation.

    Replacement value @ the end period – Avg. replacement value


    Additional Depreciation = -------------------------------------------------------------------------------------
    Life of the Asset (in years)
    Backlog depreciation
    When the fixed asset are revalued, we should not only provide the depreciation adjustment for
    the current year but should also revise the amount of depreciation provided in respect of earlier
    years.
    Backlog depreciation is the difference in depreciation to be provided on account of revaluation
    (Dep according to CCA ) and what is already provided in the accounts in respect of earlier
    years( Dep. According to HCA ). “This amount debited to CURRENT COST RESERVE ACCOUNT”
    In other words, when the fixed assets are revalued every year the dep charged in the previous
    years are not sufficient due to the effect of price level changes. Such insufficient depreciation
    provision or short fall depreciation is called backlog depreciation.

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    GFGC HEBRI PG I MCOM AFA 2021

    Backlog Dep = Additional annual dep (-) Dep Adjustment


    OR
    Dep as per CCA for backlog period- Dep as per HCA for backlog
    period

    2. Cost of Sales (COSA)


    The difference between current cost of sales at the end of accounting period and the historical
    cost of sales ( related to stock) is called COSA. Current cost must be matched against current revenue. The
    amounts of sales is in the current form and therefore no adjustment is required in the amount of sales.
    However items which enter into the computation of cost of sales, such as raw materials consumed, other
    material etc have to be taken at the present value and these would have to be replaced accordingly in
    accounting statements.
    Why COSA?
    The COSA is made to charge the current value of stocks consumed in earning the revenue during the
    accounting period. This adjustment helps to show the stocks in balance sheet at current value and also to
    adjust stock consumed in related to charging prices ( as per inflation ).

    COSA = [ C – O ] – Ia ( C / Ic – O / Io )
    Difference between opening and closing stock as per HCA(-) Difference between
    opening and closing stock as per CCA

    Where,
    C= Historical cost of closing stock
    O= Historical cost of opening stock
    Ia = Average price index
    Ic= Price index for closing stock
    Io= Price index for opening stock
    “This amount credited to CURRENT COST RESERVE ACCOUNT”

    3. Monetary Working Capital Adjustment


    Due to increase in prices the working capital as per HCA may not be sufficient for effective and
    profitable operation of a business. Under CCA method the adjustment called MWCA ensures additional
    monetary working capital requirement.
    What is MWCA ?

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    GFGC HEBRI PG I MCOM AFA 2021
    Monetary Working Capital is excess of total trade debtors, bills receivables and prepayment
    (prepaid items ) over total trade creditors , bills payable , accruals (O/S ). MWCA represents the amount of
    additional finance needed for monetary working capital as a result of changes in input prices of goods and
    services.

    MWCA = (C -O ) – Ia ( I/Ic – O/Io )


    (MWCA = Increase in MWC as per HCA – Increase in MWC as per CCA )
    Where,
    C = Closing MWC
    O = Opening MWC
    Ia = Avg. price Index
    Ic = Price index for Closing WC
    Io = Price index for Opening WC
    “This amount debited to CURRENT COST RESERVE ACCOUNT”

    Note: Conversion factor when more than one opening and closing index are given :
    Opening = Average Index
    Opening index
    closing = Average Index
    closing index
    4. Gearing Adjustment: Gearing is a ratio of borrowed capital and shareholders fund. Fixed assets
    and working capital partly financed by borrowed capital to be repaid will not change on account of
    changing price, because it is fixed by agreement. During inflation the value to the business related assets
    exceeds the amount of borrowing which was used to finance such assets . The shareholders enjoy an
    advantage in the period of raising prices because the benefit of increase in prices in fully given to
    shareholders. The reverse effect experienced when price declines. The Gearing adjustment is necessary in
    this respect because a part of net operating assets is financed by borrowings, which are to be repaid in the
    same monetary amount irrespective of changes in price. This gearing adjustment after deducting interest
    should be added to current cost operating profits and credited to CURRENT COST RESERVE ACCOUNT”.

    Gearing adjustment = Total current cost of Adjustment X Gearing ratio


    Total current cost adjustment = Dep.adj+ COSA + MWCA + FA disposal
    B
    Gearing Ratio = -------- X 100
    B+S
    Where,

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    GFGC HEBRI PG I MCOM AFA 2021
    B = Net borrowing
    S = Equity fund of shareholders
    B+ S = Net operating asset
    Net Borrowing (B)
    The Net borrowing represents the excess of ..
    a) The aggregate of all liabilities and provision fixed in monetary terms (including convertible debenture
    and deferred tax excluding proposed dividend ) other than those included within monetary working capital
    other than those which are in substance to equity capital
    OVER
    b) The aggregate of overall current assets other than those subject to a cost of sale adjustment and those
    included within monetary working capital
    Examples of items falling in category (a): Debenture , loans , provision far tax , hire purchase ,
    creditors ,leasing obligation , bank OD (if not included in the calculation of MWCA )
    Examples of items falling in category (b): Cash and bank balance , marketable securities .
    The net borrowings (a – b )
    Shareholders Fund (S)
    Shareholders fund includes all funds belonging to shareholders on the basis of current cost
    accounting.
    Shareholders fund = Equity share capital, preference share capital,reserve(including current cost
    reserve),proposed dividend , minority interest.
    Net Operating Assets ( B + S )
    It consists fixed asset, trading investment in associated companies, Stock & monetary working
    capital Note: in case in any problem you are given with opening and closing net borrowing, shareholders
    fund and net operating assets, then gearing ratio need to be calculated by taking average amount of those
    elements.

    Disposal of Fixed Asset:


    Disposal of Fixed Asset is a part of current cost adjustment. Whenever any fixed asset is sold, the profit or
    loss on such assets is need to be taken in to account. However the profit or loss as per HCA and CCA may
    differ because of difference in book value or written down value of asset at the time of sale under HCA and
    CCA

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