Historical cost accounting advantages and disadvantages pdf
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- The Historical Cost Principle (Guidance)
- Advantages and Disadvantages of Historical Cost Accounting
- Historical Cost Accounting (HCA): Meaning, Benefits and Limitations
The Historical Cost Principle (Guidance)
Accounting Principle. The concept of historical cost principle is that the assets are recorded base on the price at the time they are purchased. And the liabilities are recorded based on the values that expected to pay at the original value rather than market value or inflation-adjusted value. The Historical cost accounting principles are used mainly to record and measure the value of items in the balance sheet rather than items in the Income statements. The recognition of some items of assets or liabilities is required to records at the historical cost and the subsequent measure at the fair value. However, some items require no change in their value subsequently.
Following are some limitations of historical cost accounting :. The accounts presented on the basis of historical concept do not show many effects which are due to the inflation gap. Thus, the true and fair view is not shown. Sometimes due to inflation, some items in financial statements show higher value, it never means that the enterprise is making progress. This addition of sales is due to inflation and not increase in sales due to efficiency.
Advantages and Disadvantages of Historical Cost Accounting
The purpose of the study is to identify the scope of application of historical cost and fair value accounting. Historical cost is the purchase price of an asset acquired by a company. Fair value accounting is based on the current market situation as of the current date. Each type of valuation can be conditionally defined as subjective. However, either historical cost or fair value can be used to form the reporting indicators necessary for key users and stakeholders.
Historical cost accounting has been a controversial method that experienced many criticisms over a period of time, especially since it considers the acquisition cost of an asset and does not recognize the current market value. Merits and demerits of this method are as follows. The most obvious advantage of HC accounting is objectivity. It is a predominantly objective system, which records the original cost of an item when it was purchased. Secondly, being compared with most other methods, historical cost is an easier and cheaper way of valuation.
Historical Cost Accounting (HCA): Meaning, Benefits and Limitations
Meaning of Historical Cost Accounting 2. Benefits of Historical Cost Accounting 3. Historical Cost Accounting HCA , also known as conventional accounting, record transactions appearing in both the balance sheet and the profit and loss account in monetary amounts which reflect their historical costs, i. The historical cost principle requires that accounting records be maintained at original transaction prices and that these values be retained throughout the accounting process to serve as the basis for values in the financial statements.
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