Given certainty about inflation and sufficient flexibility in historical cost depreciation methods, historical cost accounting can provide valid measures of economic income no matter how high the inflation rate. There is no obvious need for a separate accounting for inflation merely because the inflation rate is high; extant methods of accounting for inflation are either unnecessary or wrong.
Current cost accounting, however, as a market value accounting model, is “free” from arbitrary accruals such as straight-line depreciation. For an arbitrarily chosen depreciation schedule, historical cost accounting and constant dollar accounting will produce interpretable numbers only in (mutually exclusive) special cases. By contrast, current cost accounting will produce interpretable numbers in all cases—even in the special case when specific price changes equal the general price change.
Under current cost accounting, the post-holding-gain net income will measure nominal earnings, and book values will measure entry price, exit price and value in use. The accounting rate of return (based on post-holding-gain net income) will measure the nominal rate of return. A simple computation will provide a measure of the real rate of return.
Given uncertainty about inflation, historical cost accounting cannot reflect the unanticipated portion of inflation. From this perspective, a case for accounting for inflation rests on the premise that a nontrivial portion of inflation is unanticipated. Current cost accounting can provide one means of incorporating information regarding unanticipated inflation. Constant dollar accounting will provide uninterpretable numbers except in special cases.