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Advantages and disadvantages of historical cost accounting, alternatives
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Submitted by maz600 on October 29, 2007
Category: Business
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Advantages and disadvantages of historical cost accounting, alternatives to historical cost accounting
2.1 Introduction
Accounting concepts and conventions as used in accountancy are the rules and guidelines by which the accountant lives. The historical cost accounting convention is an accounting technique that values an asset for balance sheet purposes at the price paid for the asset at the time of its acquisition.
The historical cost accounting is the situation in which accountants record revenue, expenditure and asset acquisition and disposal at historical cost: that is, the actual amounts of money, or money's worth, received or paid to complete the transaction.
Historical costs
Historical cost is a generally accepted accounting principle requiring all financial statement items be based upon original cost. Historical cost means what it cost the company for the item. It is not fair market value. This means that if a company purchased a building, it is recorded on the balance sheet at its historical cost. It is not recorded at fair market value, which would be what the company could sell the building for in the open market.
Criticisms of the historical costs method
Historical cost method, over a period of time has been subject to many criticisms, especially as it considers the acquisition cost of an asset and does not recognise the current market value. Historical costs is only interested in cost allocations and not in the value of an asset. While it tells the user the acquisition cost of an asset and its depreciation in the following years, it ignores the possibility that the current market value of that asset may be higher or lower than it suggests.
Another main criticism of historical accounting method is its obvious flaws in times of inflation. The validity of historic accounting rests on the assumption that the currency in which...
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