Historical Cost vs Current Cost
1.0 Introduction
Nowadays, high inflation is an inevitable problem in many countries. High inflation occurred owing to the demand level of goods and services are over the supply level of goods and services. It is lead to price changes taking place. Since year of 1980, several different accounting approaches were introduced to overcome these problems that reflected by inflation.
However, the historical cost accounting still widely and continuously to be used by most companies in their accounting. Conversely, reporting current cost in accounting are recommended rather than historical cost as it is the fair value reported in the current year would be beneficial to the firm and the shareholders of the company.
2.0 Historical Cost Accounting and Benefits of Current Cost
2.1 Introduction to Historical Cost, Disadvantages and Advantages of Historical Cost
The historical cost accounting is conventional adopted method and it still used in our studies and working place today. Historical basis approach stated all the financial items “are presented on the balance sheet at their value at the time of acquisition (generally represented by the original purchase cost)” (Knowledge@Wharton, 2001) [Online]. The inflation issues and current market valuation are ignored in this method. Thus, it might ‘not provide useful and relevant information for decision making’ (Han, et al, 1994, p.243). Notwithstanding the adjustments for inflation is not taking account in this method, but there are several accounting adjustments to affect the carrying value; such as “depreciation, depletion and impairment” (Graeme Pietersz, 2009) [Online].
Assets of
X Ltd | | | |Accumulated | |Net Book | |Fair | |(at 31.12.2009) | |Cost | |Depreciation | |Value | |Value | | | |(RM) | |(RM) | |(RM) | |(RM) | |Building A | |100,000.00 | |- | |100,000.00 | |120,000.00 | |Plant & Machine | |70,000.00 | |38,000.00 | |32,000.00 | |40,000.00 | |Furniture | |20,000.00 | |10,000.00 | |10,000.00 | |12,000.00 |
Nowadays, high inflation is an inevitable problem in many countries. High inflation occurred owing to the demand level of goods and services are over the supply level of goods and services. It is lead to price changes taking place. Since year of 1980, several different accounting approaches were introduced to overcome these problems that reflected by inflation.
However, the historical cost accounting still widely and continuously to be used by most companies in their accounting. Conversely, reporting current cost in accounting are recommended rather than historical cost as it is the fair value reported in the current year would be beneficial to the firm and the shareholders of the company.
2.0 Historical Cost Accounting and Benefits of Current Cost
2.1 Introduction to Historical Cost, Disadvantages and Advantages of Historical Cost
The historical cost accounting is conventional adopted method and it still used in our studies and working place today. Historical basis approach stated all the financial items “are presented on the balance sheet at their value at the time of acquisition (generally represented by the original purchase cost)” (Knowledge@Wharton, 2001) [Online]. The inflation issues and current market valuation are ignored in this method. Thus, it might ‘not provide useful and relevant information for decision making’ (Han, et al, 1994, p.243). Notwithstanding the adjustments for inflation is not taking account in this method, but there are several accounting adjustments to affect the carrying value; such as “depreciation, depletion and impairment” (Graeme Pietersz, 2009) [Online].
Assets of
X Ltd | | | |Accumulated | |Net Book | |Fair | |(at 31.12.2009) | |Cost | |Depreciation | |Value | |Value | | | |(RM) | |(RM) | |(RM) | |(RM) | |Building A | |100,000.00 | |- | |100,000.00 | |120,000.00 | |Plant & Machine | |70,000.00 | |38,000.00 | |32,000.00 | |40,000.00 | |Furniture | |20,000.00 | |10,000.00 | |10,000.00 | |12,000.00 |