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What is the meaning of base year?

Author:
Harold Averkamp, CPA, MBA

In accounting, base year may refer to the year in which a U.S. business had adopted the LIFO cost flow assumption for valuing its inventory and its cost of goods sold. Under the dollar-value LIFO technique a company’s current inventory is restated to base-year prices in order to determine whether the quantity of inventory has increased or decreased.

Base year is also the initial year in a series of annual amounts. For instance, an accountant might prepare a chart that displays the dollar amounts of a company’s sales, gross profit, and net income for each of the years 2021 through 2023. In addition the accountant might add a price index for each line which expresses each line’s amounts as a percentage of the 2021 amount. In this example the base year is 2021. Assuming that the sales for the years 2021 and 2022 and 2023 were $924,000 and $942,480 and $979,440, each of these would be divided by the $924,000 of sales in the base year 2021. The result would be the following index: 100 (for the base year 2021) and 102 (for 2022) and 106 (for 2023).

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About the Author

Harold Averkamp

For the past 52 years, Harold Averkamp (CPA, MBA) has worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. He is the sole author of all the materials on AccountingCoach.com.

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