Historical Accounting And Current Cost Accounting

1080 Words5 Pages
Question 6
Explain the differences between Historical Cost Accounting and Current Cost Accounting (include advantages and disadvantages).
Historical Cost Accounting is the “financial accounting based on the original cost of an item ignoring inflationary increases” It records an asset based on its actual value without any adjustments for inflation. On a balance sheet the value of assets are the purchase cost of the assets. Whereas, current cost accounting is a form of accounting in which the approach to capital maintenance is based on maintaining the operating capability of the business. The assets are measured according to their shares daily based on replacement cost the last trade of the day.
The advantages of historical cost accounting is that it is simple, a more conventional method, reliable and verifiable, information is free from any bias views. It leads to absolute certainty and fits in perfectly with the cash flow statement, as it tells what has been paid exactly or received and giving no doubt in balance sheet amounts. This method also helps businesses estimate the future cost with the help of original values that are recorded in financial statements of past years. The disadvantages is that it doesn’t provide enough information that is relevant to investors. It is interested in cost distribution, not the actual values of the asset. Doesn’t have any adjustments for inflation. The financial statement of the business presents an old interest rate and outdated
Open Document