Advantages and Disadvantages of Historical Cost Accounting

Topics: Generally Accepted Accounting Principles, Balance sheet, Costs Pages: 3 (656 words) Published: November 29, 2010
Advantages and disadvantages of Historical Cost accounting
Historical cost accounting has been a controversial method that experienced many criticisms over a period of time, especially since it considers the acquisition cost of an asset and does not recognize the current market value. Merits and demerits of this method are as follows.

The most obvious advantage of HC accounting is objectivity. It is a predominantly objective system, which records the original cost of an item when it was purchased. Under historical cost accounting there is no room for manipulation and “the data is supported by independent documentary evidence, such as invoice, statement, cheque counterfoil, receipt or voucher.”(Elliott and Elliott:43) Any other method for recording transactions would be less objectives since the amount being recorded would depend on individual point of view and is various from different people.

Secondly, being compared with most other methods, historical cost is an easier and cheaper way of valuation. In respect that the original cost is one that already existed and could not be amended, which is easy to determine and can be verified. Therefore, it requires less estimation for accountants to record the data and easier for auditor to inspect them subsequently. In addition,” as a basis of fact, it is verifiable and to that extent is beyond dispute”. (Alexander and Nobes :180)

Another significant advantage of it is reliability, which is one of the key characteristics of financial reporting, as examined in the IASB’s Framework. As a past value, for most assets historical cost is more reliably determined than other current valuation such as fair value. This measurement can ensure that there are not excess benefits to users. (Alexander and Nobes:181)

Unfortunately, as every coin has two sides, HC accounting also can not avoid having drawbacks. The main disadvantage exists in the subsequent days after acquisition. “The continued reporting of historical cost...
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