Pros And Cons Of Historical Cost Accounting

Historical cost accounts do not measure the loss of value of monetary assets as a result of inflation. So in case of high inflation, the assets could be mispricing and provoke disturbances in the analysts. The validity of historical-cost accounting is based on the assumption that the currency in which transactions are recorded remains stable, that is to say its purchasing power remains the same over a period of time.

The cost accounting system at the Mint is just one of the three types of major accounting system is used for general and bullion accounting. The cost accounting systems is subsidiary to general accounting and it is decentralized to each production facility. According to the author, cost accounting is an integral part of the overall accounting system (Kess, 1995). The Mint generally used the full cost or absorption method. This method assigns all manufacturing costs to the cost of goods manufactured (Kess, 1995).

Depreciation is the reduction in the value of certain fixed assets. It is a periodic reduction of fixed assets, usually done every year. Fixed assets are assets that add value to the company. Examples of fixed assets that can be depreciated are vehicles, buildings, machinery, equipment and fixture and fittings. The only fixed asset that is not depreciated is land, because it is not worn-out overtime, unless natural resources are being exploited. When a company buys a new fixed asset it doesn’t account for the full cost of it as one single large expense, instead the expense is spread over the life time of the asset. This is done by depreciating the asset. For example a company purchases a CNC router for €50,000 and will be used for five year. If they pay the full amount in the

Depreciation involves spreading the cost of an item over several years or over its useful lifetime. This is an accounting of the reduction in value of the merchandise and it will be reflected as an expense on the company’s income statement. Therefore, this is important because nothing holds its full value over time and organizations need to account for the devaluation. Accountants and financial officers follow GAAP guidelines to determine depreciation. The depreciation of an item is an estimated guess not a proven reality.

Over the past several years, there has been a growing controversy over the accounting issues of fair values and historical cost. The basis of this controversy revolves around which one of these principles is the most accurate. There are many different viewpoints on this issue. Many accounting professionals believe that fair value is just as accurate as the historical cost principle, while others believe that the historical cost is more reliable. The facts about each of these valuation methods will be researched and explained throughout this research document, as well as the different viewpoint about which method is the most accurate and reliable.

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

As is mentioned, fair value accounting and historical cost accounting are under heated discussion among scholars, concerning the issue of financial reporting and risk management. By definition, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. On the other hand, historical cost is a valuation method in which the price of an asset on the balance sheet is based on its nominal or original cost when acquired by the company. [1]

The discussion takes place within the context of different bases of valuation—cash basis, historical cost, and current value. This discussion also helps the instructor to learn more about the students’ background and ability. Historical cost accounting is presented as a compromise between cash accounting (high reliability but low relevance) and current value accounting (low reliability but high relevance). The matching problem of historical cost accounting is illustrated, with specific reference to amortization and full cost v. successful efforts accounting in oil and gas.

Historic cost accounting means "requiring all financial statement items be based on original cost" (Thompson, 2007). Fair value reporting means that the financial statement item is recorded based on its current value. In general, fair value reporting would only apply to derivatives and other assets with similarly fluctuating market values. However, it could be applied to things like fixed assets or inventories as well. Cost accounting accommodates for fluctuating market values in other ways, for example writedowns for inventory or allowances for receivables that are not expected to be paid.

According to Rodríguez-Pérez et al (2011) the debate between the choice of Fair value and Historical cost accounting essentially takes root from the debate of relevance and reliability. The IASB Framework defines relevancy as when information “influences the economic decisions of users by helping them evaluate past, present or future events or confirming, or correcting, their past evaluations.”Reliability as defined by the IASB framework is when information is faithfully represented, prudent, it contains substance over form, it is neutral, and complete. Even though both

Fair value measurement had gained its hold decades ago in various western world. Relevant jurisdiction and accounting standards had authorized fair value as essential recognition of balance sheet and income [ WR LandsmanFair value accounting for financial instruments: some implications for bank regulation 2006, BIS working paper 209, University of North Corolina Kenan-Flagler Business school]. On 1st August 2008, the scenario behind accounting practices in Malaysia face a regulatory change with the introduction and adoption of FRS 139 “Financial Instruments: Recognition and Measurement” with effective date of 1st January 2010. This is deemed as the first step in recognizing fair value accounting as a reliable and updated practice or model.

Current cost accounting (CCA) is an accounting system in which assets are valued at current market buying prices and profit is determined by allocation based on current costs.

Cost volume profit (CVP) analysis and costing for the 21st century has evolved into a very complex and difficult paradigm. Even the most gifted accountants find that grasping the entire concept of accounting for a corporation can be very mind-boggling and difficult. Yet, understanding such a fundamental principle can allow corporations to grow in ways that other, less educated, corporations can never dream to achieve and simultaneously understand the ‘bottom-line’. In this paper we will discuss value costing in the 21st century, other relevant costing methods, and the relevancy of CVP in today’s workplace.

Nowadays, most companies usually utilize the Historical Cost accounting to report financial statements and reflect the profitability of business. It is more conventional and simple method. Nevertheless, when considered in relation to inflation and price changes, the alternative methods such as Current Purchasing Power Accounting (CPPA), Continuously Contemporary Accounting(CoCoA) and Current Cost Accounting(CCA) would be more appropriate. There is an assumption that ‘ applying those alternative forms of accounting to adjust items in financial statements is a useful approach to reflect the profitability of a company for shareholders and stakeholders’. Firstly, this statement can be assumed as correct, and it will be discussed

Accounting Costs : are the actual or outlay costs. These costs point out how much expenditure has already been incurred on a particular process or on production as such. Since these costs relate to the past, these are generally sunk costs. The accounting costs are useful for managing taxation needs as well as to calculate profit or loss of the firm.