Disadvantages Of Historical Cost Accounting

Historical cost accounting explained that an asset should be recorded at its original cost at the time of the transaction occurred.The historical cost principle also called as cost principle. The historical-cost method is used for assets in the U.S. under generally accepted accounting principals (GAAP) (Investopedia, n.d). Most assets on the balance sheet or Statement of Financial Position (SOFP) are recorded at the nominal or original cost when acquired by the company even if they have change in value over time significantly. By accessing the source purchase, historical cost can be easily proven. There are source purchase like invoices, payments, contracts, transfer taxes and so on. For example, XYZ Company bought few lands at the total cost

Historical costs require some adjustment as time passes according the accounting standards. For the non-current assets, depreciation expense is recorded and needed to be deducted from the original cost over their estimated useful lives. Therefore, it ignores the possibility that the current market value of the asset may be higher or lower than it suggests (echeat, n.d) by only focusing on the acquisition cost and depreciation expense. Besides, it also assumes that the currency in which the transaction was recorded always stable which suggests indirectly that the purchasing power remains the same over a period of time. In addition, current prices for an asset will rises due to inflation. Because of inflation, an asset purchased may be more expensive in future than current price. The financial statements provided under historical costs accounting may not have correct amount. For example, income statement prepared under historical cost accounting have unrealistic profit for the

The assets are recorded at their current value instead of historical cost are more accurate and the financial statements provided will be more realistic. Because it can have better presentation of economic reality of transactions and thus provide more useful and relevant information than the historical cost financial reporting does (Academiaedu, 2015). So, it is easier for the users to examine the financial statements and they can make wiser decision for future business operations (Troy adkins, 2009). Advocates of fair value accounting say current value accounting would give users of financial statements a far clearer picture of the economic state of a company. The users can have a clearer picture about company's performance and they can make wiser decisions on the investment of the company (UKEssayscom, 2015).

One of the disadvantages of current value accounting is very subjective. This accounting method is used to record the assets at the current value instead of actual value of the assets. The assets’ exact current value is difficult to be determined because the individual point of view might be not same with the others. Therefore, this accounting method is