Accounting Methods

Topics: Asset, Costs, Balance sheet Pages: 3 (713 words) Published: February 16, 2013
Historical cost accounting
Historical cost accounts are straightforward to produce
Historical cost accounts do not record gains until they are realized •Historical cost accounts are still used in most accounting systems Disadvantages
Historical cost accounts give no indication of current values of the assets of a business •Historical cost accounts do not record the opportunity costs of the use of older assets, particularly property which may be recorded at a value based on costs incurred many years ago •Historical cost accounts do not measure the loss of value of monetary assets as a result of inflation. Current purchasing power accounting

CPP method adopts the same unit of measurement by taking into account the price changes. •Under CPP method, historical accounts continue to be maintained. CPP statements are prepared on supplementary basis. • CPP method facilitates the calculation of gain or loss in purchasing power due to the holding of monetary items. •CPP method uses common purchasing power as measuring unit. So, the comparative study is easy. • CPP method provides reliable financial information for taking management decision to formulate plans and policies. •CPP method ensures keeping intact the purchasing power of capital contributed by shareholders. So, this method is of great importance from the point of view of the shareholders. Disadvantages

CPP method considers only the changes in general purchasing power. It does not consider the changes in the value of individual items. •CPP method is based on statistical index number which cannot be used in an individual firm. • It is very difficult to choose a suitable price index.

CPP method fails to remove all the defects of historical cost accounting system. •The use of general price index for CPP method is questioned. While general price index deals with consumer goods, business is interested in the price movement of producer goods. Current cost accounting...
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