Historical Cost vs Current Cost

2348 WordsOct 23, 201110 Pages
1.0 Introduction Nowadays, high inflation is an inevitable problem in many countries. High inflation occurred owing to the demand level of goods and services are over the supply level of goods and services. It is lead to price changes taking place. Since year of 1980, several different accounting approaches were introduced to overcome these problems that reflected by inflation. However, the historical cost accounting still widely and continuously to be used by most companies in their accounting. Conversely, reporting current cost in accounting are recommended rather than historical cost as it is the fair value reported in the current year would be beneficial to the firm and the shareholders of the company. 2.0 Historical Cost…show more content…
For examples, the replacement cost in the current market, the adjusted historical cost based on the real retail price index, net realisable value, and so on. There are several benefits by providing these current costs. “An advantage of replacement cost is that it focuses on the services the asset will provide rather than the precise physical asset” (Thompsom,2007) [Online]. Replacement cost defined “as the estimated amount that would have to be paid in order to replace the asset as the date of valuation” (Thompsom,2007) [Online]. The estimation of replacement cost is derived after reviewing the asset in the current market and also can be recognised by trading amount of a same asset in the current market. Furthermore, net reliasable value is the “estimated amount that would be received from the sale of the asset less the estimated costs on its disposal” (Wood and Sangster, 2008, p.442). Generally, net reliasable value is use to identify the assets which are damaged, obsolesce, out-dated and so on. Hence, the value derived from this method should be applied to the financial reports and make these reports more relevant and practicable in the present market. Apart from this, adjusted historical cost accounting that also known as current purchasing power accounting is using to determine the today’s cost of the assets. Normally, this method reflects the historical cost

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