Advantages of Current Purchasing Power (CPP) Method

Current Purchasing Power Method (C.P.P.) is also known as General Price-Level Accounting. CPP method is useful for finding out the real financial position of an organization. CPP is a method of accounting for inflation, which is based on the general price level index used as a deflator of the nominal value arrived at using historical cost accounting. This method is based on the concept that a business enterprise is a going concern that is continuously replacing its assets.

“Current Purchasing Power (CPP) method uses current money and values assets at their acquisition costs and hence no adjustment for inflation is done in the accounts.”

 Following are the advantages of the CPP method –

(1) CPP method adopts the same unit of measurement by taking into account the price changes.

(2) Under the CPP method, historical accounts continue to be maintained. CPP statements are prepared on a supplementary basis.

(3) CPP method facilitates the calculation of gain or loss in purchasing power due to the holding of monetary items.

(4) CPP method uses common purchasing power as a measuring unit. So, the comparative study is easy.

(5) CPP method provides reliable financial information for taking management decisions to formulate plans and policies.

(6) CPP method ensures keeping intact the purchasing power of capital contributed by shareholders. So, this method is of great importance from the point of view of the shareholders.

(7) CPI data also readily available, no need to incur the cost or effort to collect data about current asset values

The objective of deflation is to maintain the purchasing power of capital to that at the beginning of the period. The assumption of CPP is that prices of individual items move in the same direction and in the same rate (hence general price index number). The method uses current money and values assets at their acquisition costs and hence no adjustment for inflation is done in the accounts. For the purpose of CPP, it is important to distinguish between two classes of items, monetary and non- monetary items.