Accounting: The Advantages Of Historical Cost Accounting

Historical cost accounting refers to the measure of value used in accounting in which the price of an asset at the balance sheet is based on its nominal or original value when acquired by the company. The historical-cost method is used for assets in the U.S. under generally accepted accounting principals (GAAP). Based on the historical-cost principle, under U.S. GAAP, most assets held on the balance sheet are to be recorded at the historical cost even if they have significantly changed in value over time.

The main advantage of using historical cost is that it is objectivity. When using historical cost accounting to record assets such as property, vehicles and equipment, the original cost of an item at the time of purchase is documented with

This is because historical cost is one that already existed and could not be amended. It is easy to be determined and can be verified. Thus, it requires less estimations of accountant to record data and easier fr auditor to inspect them subsequently.

However, the historical cost accounting method faced a lot of criticism. The main reason is because it does not evaluate the current market value instead considers only the cost at the time of purchase. Thus, the main focus is on cost allocation instead of the value of asset for historical cost model. The method ignores the possibility of the value of the asset being high or sometime may be low than the current market value. It simply focuses on the acquisition cost and its depreciation. Apart from this historical cost accounting is criticized for not being able to establish value at the time of inflation. It assumes that the currency in which the transaction was done at the time of acquisition of the asset remains constant which indirectly suggests that the purchasing power is unchanged over a period of time. In regards to inflation, the current price of the asset will rise means that it may cost more in the future than what the current price is or at the time of future purchase. Also inflation does not have the same impact on all companies and thus, historical cost model was not useful to compare corporate

The current value of current cost accounting better presents the economic reality of transactions and therefore it tends to provide more useful and relevant information than historical cost financial reporting. Due to the business environments are keep on changing, it is said to be increasingly volatile, the financial statements of firms should portray the underlying economic reality of the firms rather than the summary of past transactions. The current value of financial reporting may be less reliable due to the subjectivity of certain measurements, but it can provide much more relevant and meaningful information to the users despite the subjectivity involved in the