Inflation Accounting and SMEs

Inflation accounting is a technical procedure handled by your financial advisor. But the idea behind it is something every business owner should know.

Here is the concept: 100 liras from two years ago is not the same as 100 liras today. If your records ignore this, your profits will look larger than they actually are.

Where is the problem?

Accounting records assets at their purchase-date value. A machine you bought three years ago stays on your balance sheet at its price from three years ago.

During periods of high inflation, this is like doing math with two different currencies mixed together: old liras and new liras are added up in the same table.

This result is most visible in inventory. When you sell cheaply acquired goods at today's prices, accounting counts this as profit. However, if you cannot replace the same goods with that money, you haven't made a real gain.

This is called "fictitious profit." And real taxes are paid on it.

What does the adjustment do?

Inflation adjustment converts non-monetary items on the balance sheet to today's purchasing power. Inventories, fixed assets, and capital are updated using an adjustment coefficient.

Cash, bank accounts, receivables, and payables are not adjusted because they are monetary items—they already stand at their current value.

The difference resulting from this transaction is reflected in the records as profit or loss, affecting the tax base.

The application comes into play when certain inflation thresholds are exceeded and for designated taxpayer groups. Confirm with your financial advisor whether you are covered this year; the rules change periodically.

What should a business owner do?

You won't be doing the adjustment process yourself. But you need to bring its logic into your daily decisions.

Look at replacement cost in pricing. It is not what you bought the goods for, but how much you can buy the same goods for today that matters. Calculating margins over old costs silently erodes capital.

Keep your inventory value updated. In a business where inventory costs are outdated, profit reports do not show reality. We covered this topic in the inventory tracking article.

Reflect payment terms in your pricing. A three-month deferred sale is worth less than a cash sale. Pricing that fails to account for maturity differences means a loss in an inflationary environment.

Collect your receivables quickly. Monetary receivables melt against inflation. Delayed collection is not just a cash flow problem, but a direct loss of value. Check out the overdue receivables article.

When reading your profit report

The profit figure you see at the end of the month is a result calculated using the costs of that period. During periods of high inflation, assume that a portion of this figure comes from inventory value increases.

A practical check: can you replace the exact goods you sold with an amount of money equal to your period profit? If the answer is no, part of the profit is only on paper.

Frequently asked questions

Is inflation accounting over?

The application depends on the realization of inflation conditions specified by law. When conditions are not met, it is not applied. Verify this year's status with your financial advisor.

Are simplified procedure and small business ledgers also included?

The practice primarily concerns those who keep books on a balance sheet basis. Check the simplified procedure article.

Will it increase or decrease my taxes?

It depends on your balance sheet structure. It yields different results for businesses with heavy inventory and fixed assets compared to liability-heavy structures.

Do I need to do anything in my pre-accounting software?

The adjustment is made on the financial advisor's side. Your job is to ensure that cost and inventory records are accurate.

Inflation accounting is a technical subject, but the question it asks is very simple: did you actually make a profit? Asking this question regularly is the best financial habit.

You can open a free account on Qolay.App and track your costs and profitability in real-time.