Advantages and Disadvantages of Hstorical Cost Accounting

Abstract: The choice between fair value and historical cost accounting is the subject of longstanding controversy among accounting academics and regulators. Nevertheless, the market based evidence on this subject is very limited. We study the choice of fair value versus historical

Historical record: One of the early objectives of historical cost accounting was stewardship. This meant that financial reports were a report on how well management had safeguarded the

Financial world is at the pace when the accountants are moving their steps towards fair value accounting, moreover FASB and IASB is motivating accountants to increase the use of fair value accounting by establishing new rules. Most of the people concur that fair values are the most reliable measure for financial assets and liabilities that an entity strongly trades, on the other hand some believes if management wants to hold an asset or liability till their maturity then historical method is best for measuring financial assets.

One of the main advantages of fair value accounting is that it provides a basis for reporting financial information on a company to provide users with accurate valuation of assets and liabilities. When the assets or liabilities of the price rising or are expected to increase, the company will be the value of the assets or liabilities, to reflect it will get the assets or liabilities, to reflect its assets or will receive payment to lift their responsibilities. On the contrary, the company marked the value of the assets or liabilities, to reflect the market price of any ability decreased. The fair value accounting limited a company, it may be possible to manipulate its net income sometimes. The management, may deliberately arrange some asset sales, for example, the use of gains or losses,

Further, accounting has difficulties to clearly measure performance and the value of assets. Therefore, many different methods exist as historical cost, present value, current replacement costs, net realisable value, and deprival value accounting and all are reasonable in their approaches.

Cost accounting is a process of recording, classifying, analyzing, summarizing allocating and evaluating various alternative courses of action and control of costs. Cost accounting involves the techniques for:

What is the objective of current cost accounting? Edwards and Bell express this fundamental problem in terms of three questions:

At the beginning of the 21th century, the Financial Accounting Standards Board (FASB) started to realize the importance of fair value accounting as for a new measurement basis for asset and liability. The FASB believed the primary objective of financial reporting is to provide relevant and useful information about the future cash flow to current and prospective investors and creditors (Whittington, 2008). Since the historical cost accounting usually gives information about past transaction, not information about the future, to existing shareholders or creditors, FASB thought financial statements based on historical cost accounting could not be relevant and useful to prospective investors, which makes them difficult to achieve the main

The accounting profession is perhaps one of the most diverse of them all. Not only are there many different accounting functions such as financial reporting, auditing, accounts receivable, budgeting, investments, analysis, or fixed asset accounting (to name a few), but there’s the fact that accountants are needed for almost every business in every industry. So it comes as no surprise that these are positions with great responsibility. Accountants are often called the gatekeepers of a business’ financial system and rightfully so! They are the ones who are responsible for keeping numerous records and backup of all financial transactions. Accountants are the ones who must keep a watchful eye on the financial health of an organization and who report the financial position with clear and unadulterated statements. Unfortunately, there are those who for a number of reasons are tempted and pressured into manipulating accounting entries so that the financial reports do not accurately reflect the company’s financial position.

The fundamental accounting principle that firms are compelled to follow when presenting their performances of a certain period is based on earnings, not realised cash flows. That is, recording a transaction as it happens regardless of the collection of cash which involved in it (Marshall,

When reading financial data, some attention must be paid to assess their veracity. Over the past, some accounting techniques have been used to mislead investors on the true financial situation of the company. We’ll details some of them.

The known systematic and scientific accounting was first introduced by Luca Pacioli a.k.a “Father of Accounting” in 1494 where he recorded transactions in double entry accounting system. After the industrial revolutions in 18th Century, hundreds of manufacturing industries were established which led to numerous and complex transactions, thus recording and interpreting this data proved essential to be efficient and effective in drawing decisions. The traceable cost accounting implemented in practice was by textile mills, railroads and steel manufacturing industries as they handled large volume of transactions and planning was a key for success and estimating profitability. To this point, businesses only focused on the (direct) cost side of

An important function of the accounting field is to provide external users of financial statements with assurance that the financial information being presented is both reliable and accurate. This basic function of accounting is so important that there is an entire field of experts, called auditors, dedicated to assuring its proper performance. Throughout history there have been many instances in which the basic equilibrium between an institution and current/potential investor has been threatened due to a lack of accountability and trust between the two parties. This issue has been the catalyst for many discussions regarding the proper procedures a firm should follow in order to provide

Furthermore, even if management lacks the intention to sell, there remain events and circumstances beyond the control of management that can force the need to sell. By measuring the changes in fair value in net income it allows the investors to know the potential effects of these events and circumstances. Critics of the fair value measurement cite the increase in volatility that it causes in net income. A distinct disadvantage to reporting the gains and losses on the income statement is that these gains and losses have not actually occurred and may not ever be realized (Proposed change…, 2009).

This brief report will cover various definitions of dissimilar types of costing such as Marginal costing and more. It will also aim to provide examples where necessary to explain the definitions more clearly and in detail. As following this introduction, there are a few different types of costing methods well defined and analysed in order to help with decision making. The purpose behind costing is to determine the value inventory as the cost per unit can be used to value stock in the statement of financial position. It could also record the costs associated with the product need to be recorded in the income statement. Costing also assists with pricing products as the organisation will use the cost per unit to assist in pricing the product.