There are many tools that can assist a business owner when it comes to financial elements. One such tool is the CPP, also known as the constant purchasing power, which is an accounting measuring tool that effectively shows the effects of inflation on the value of money at any given time. The historical costs are converted into current pricing values by using the index reflected in the consumer price index of the day also referred to as CPI.
Purchasing Power
The following are some of the elements that contribute positively to the business through the use of this method:
This method ideally adopts the same unit of measurement when it takes into account the price changes or any fluctuations. This is especially useful as it gives the business owner a better understanding of the current positions and values of elements in “real time”.
With the help of the constant purchasing power accounting tool the historical accounts continue to be maintained and statements are prepared on a supplementary basis.
This will then facilitate the calculations of gains and losses in the actual purchasing power because of the monetary items being held.
Comparative studies are made much easier as the purchasing power is done in measuring units and this then makes any overview or study of the financials fairly easy.
The reliability of the information is also advantageous for those making management decisions that formulate the plans and policies for the business and its future.
If there are other participating entities within the business setup, the constant purchasing power accounting tool will help to ensure the capital contributors are kept in the “know” thus keeping the purchasing power within the boundaries of those shareholders. However it should be noted that though this tool can be rather helpful, it only deals in the general purchasing power and not in the actual changes the value of the individual items may bear.