Historical Accounting And Current Cost Accounting

Question 6 Explain the differences between Historical Cost Accounting and Current Cost Accounting (include advantages and disadvantages). Historical Cost Accounting is the â€Å"financial accounting based on the original cost of an item ignoring inflationary increases† It records an asset based on its actual value without any adjustments for inflation. On a balance sheet the value of assets are the purchase cost of the assets. Whereas, current cost accounting is a form of accounting in which the approach to capital maintenance is based on maintaining the operating capability of the business. The assets are measured according to their shares daily based on replacement cost the last trade of the day. The advantages of historical cost accounting is that it is simple, a more conventional method, reliable and verifiable, information is free from any bias views. It leads to absolute certainty and fits in perfectly with the cash flow statement, as it tells what has been paid exactly or received and giving no doubt in balance sheet amounts. This method also helps businesses estimate the future cost with the help of original values that are recorded in financial statements of past years. The disadvantages is that it doesn’t provide enough information that is relevant to investors. It is interested in cost distribution, not the actual values of the asset. Doesn’t have any adjustments for inflation. The financial statement of the business presents an old interest rate and outdatedShow MoreRelatedThe principle of historical cost is still used in accounting when there is a large measure of agreement that it is inappropriate. Discuss.1226 Words   |  5 PagesSynopsis. Historical Cost Accounting is a traditional valuation method as it reflects only on the past cost of the asset, however in the contemporary business environment companies must remain flexible and transparent. This belief has lead to the creation of several other valuation methods, due to word constraints I have focused primarily on Fair Value Accounting as an alternative to Historical Cost Accounting. Although Fair value accounting is a theoretically superior valuation methodology, thereRead MoreAdvantages and Disadvantages of Hstorical Cost Accounting1241 Words   |  5 PagesHstorical Cost Accounting Advantages and disadvantages of historical cost accounting, alternatives to historical cost accounting 2.1 Introduction Accounting concepts and conventions as used in accountancy are the rules and guidelines by which the accountant lives. The historical cost accounting convention is an accounting technique that values an asset for balance sheet purposes at the price paid for the asset at the time of its acquisition. The historical cost accounting is the situationRead MoreHistorical Cost and Fair Value1733 Words   |  7 PagesAbstract This paper is written for the accounting theory course as a course project. This paper discusses the differences between the historical cost accounting approach and the fair value accounting approach. The discussion will focus on the debate on using which accounting approach. We begin by stating the definitions of both concepts and discussing them thoroughly, then we state the main advantages of the two approaches followed by comparison between them. The last section of this paper discussesRead MoreContinuously Contemporary Accounting1692 Words   |  7 PagesIntroduction Over the past years there have been many accounting measurement systems developed to replace or serve as a supplement to historical cost accounting. However it is not possible, at present, to state which system, if any, is likely to replace the historical cost system. Perhaps the most notable system is Continuously Contemporary Accounting (CoCoA), proposed by Australian researcher, Raymond Chambers. Chambers quoted â€Å"†¦that thousands of shareholders had lost millions of dollars on securityRead MoreFair Value vs. Historical Cost Accounting1188 Words   |  5 PagesDifference between historical cost and fair value accounting In order to make the most profitable and rational decisions entity’s stakeholders have to evaluate organisation’s financial statements. Today’s world of rapidly changing prices has made it difficult to estimate what something is actually worth. Thus leading to debates at what price – historical costing price or market value – assets and liabilities should be reported. Therefore, before making any evaluations about reported transactionsRead MoreHistorical Cost vs. Fair Value695 Words   |  3 PagesThe basic purpose of accounting is to provide information that is useful to investors, creditors and others in making rational economic decisions. One accounting issue that has been debated on a lot is the historical cost method versus the fair value measurement. The historical cost method has been the basis of GAAP accounting for the past decade but has slowly been disappearing. Today it is starting to be replaced by the fair value method of accounting . When choosing a valuation method, it seemsRead MoreLimitations of Historical Costing in Times of Inflation1280 Words   |  6 Pages5 Normative theories of accounting 1: The case of accounting for changing prices Learning Objectives http://www.download-it.org/learning-resources.php?promoCode=partnerID=content=storystoryID=19988 Upon completing this chapter readers should: ââ€"† be aware of some particular limitations of historical cost accounting in terms of its ability to cope with various issues associated with changing prices; ââ€"† be aware of a number of alternative methods of accounting that have been developed toRead MoreOriginal Alternative Methods Of Historical Cost Accounting966 Words   |  4 Pagesusually 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 itemsRead MoreAccounting Theory 41063 Words   |  5 PagesFair value or false accounting 1. How are assets and liabilities measured under IAS 39? Answer: According to IAS 39, Financial Instruments: Recognition and Measurement, financial instrument are to be stated at their ‘fair value’- defined as ‘the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction’. ‘If the market for a financial instrument is not active, an entity establishes a fair valueRead MoreAccounting Research: Advantages of Cash Flow1720 Words   |  7 Pagesdependent on accounting conventions and concepts/principles * Cash flow reporting satisfies the needs of all users better since cash flow is more direct with its messages. Some of the interested user parties are: * Creditors   -repayment of debts, overdue accounts * Management -cash flow reporting provides the type of information which decision should be taken re: relevant costs ( decision based on future cash flow) * Shareholders amp; Auditors -cash flow accounting and reporting