Submitted to: Dr. James Tong
MBA 507: Management Accounting
Submitted by: Rajvinder Brar
Definition – Historical cost
In accounting, historical cost is the original financial or monetary value of any economic item. It is based on a stable measuring assumption of a unit. Sometimes under some circumstances, assets and liabilities on a balance sheet can be shown at their historical or the original value at the time of purchase can be shown, as if there has been no change since it has been bought until after sometime. Also sometimes, the balance sheet value of the item may differ from its “true” value.
Historical costs are not useless in rapidly changing environment though it does not provide the market value of an economic item at that particular point of time. The historical cost provides the management and the investors significant other options in recognising, reporting and measuring economic information. It cannot be useless, as it will help the owner or he manager to forecast the coming operational costs based on the previously available data. Its basic function is to tell the user the actual or true cost of the item. Without knowing the original costs future projections can be misdirected. Historical cost is such advantageous that it is recognised and accepted by the multinational and corporations around the world. People know the historical accounting system, it might be very difficult to replace this method with ant foolproof method, and it will be more difficult for the accounting bodies to absolutely remove and replace it.
Though, it is very difficult to replace historical cost accounting system but accounting systems should not e limited to historical costs. There has to be a...