Advantages And Disadvantages Of Historical Cost Accounting

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1. Academicians as well as practitioners have long debated the issue of historical cost accounting versus current value accounting.
The historical cost is the original nominal monetary value of the items purchased. Based on the historical cost concept, it states that the amount of the assets acquired should be recorded with the original amount paid at date of acquisition and should include all costs necessary to get the asset in place and ready for use. Historical cost helps to distinguish an asset’s original cost from its current replacement cost, current market cost and inflation-adjusted cost as it does not generally reflect the current market valuation. It is never adjusted for the future market or economy changes and inflation. For example,
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The one of the advantages is the historical cost can be verified. The cost of purchases at date of acquisition is documented with contracts, invoices and payments. It is useful in matching the changes in profits or expenses relating to the asset purchased, as well as determining the past opportunity costs. With historical cost accounting, managers have the resources to forecast the future operational costs. On the other hand, FASB has decided to use the historical cost principle because it is reliable and objective. It is also easy to use and understand. The disadvantages of historical cost accounting include that it does not evaluate the current market value. It does not really tell the financial users how much the assets are currently worth. Furthermore, historical cost accounting does not record the opportunity cost of using the old assets. It does not record the loss in real value of assets as a result of inflation or the gain in real value of assets as a result of deflation. It is claimed that it is not useful for financial information users to compare the corporate’s performance over time. Lastly, the financial information in historical cost concept presents an old interest rate and outdated

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