Historical Cost Accounting Essay

Historical live is a traditional order of reading additions and liabilities at their original or nominal hold dear without qualification adjustments for pretentiousness. It first came in evidence in Jun 1979 in a cut project after numerous debates. The diachronic apostrophize principle states that the asset should include all cost necessary to get the asset in place and ready for use. The principle of historical cost is based upon two fundamental principles the principle of monetary standardization and principle of free will. The principle of monetary standardization ignores the fluctuations in monetary values of asset and liability. The principle of prudence accounts only the losses entirely ignores potential profit. Assets be evaluated based on getting cost, stock is evaluated based on net realizable value or lower cost and debt according to nominal value non present value.Under U.S GAAP ( Generally Accepted Accounting Principles) about assets argon recorded at hi storical cost except for plastered financial instruments like trading securities, available for sale securities, derivatives. Under IFRS (International financial Reporting Standards) historical cost is acceptable but not call for for proportion plant and equipment but intangible assets, seat, plant and equipment, and deckment property may be revalued to fair value. But revaluation will draw to be applied to all assets of opusicular class and they have to grass sure this done with regularity so that there is not that stupendous difference between carrying value and securities industry value. Even though in historical cost there is no routine adjustments for inflation but for calculating book value calculations like depreciation, amortization, depletion be done. Historical cost reflects the real value of items at the date of their entering the company.Historical cost is truly more sure, reliable and checkable value. For asset it is the amount paid or to be paid and in case of debt it is the value of equivalents obtained in permute of obligation or the value to be paid in bills or cash equivalents to settle the debt. Historical cost is more precise and relevant to make stinting decisions since affects the evaluation and selection of decision rule. In order to make decisions and decide which decision rule to choose it take information which is of same quality of past decisions. Even for making work out past data is accepted as a basis for prevision which facilitates decision making in an organization. For example- for forecasting price for the next class a company needs past prices as a basis. unless it concentrates on what has been earned rather than what could have been earn. Current value news report anticipates profits that may never be realized. If (for example) the current market prices of property or investments are very different from their historical cost, this information apprize be disclosed in the notes to the financial statements .There is no need to adjust the amounts in the statement of financial position or the early(a) primary statements. Accounting data under historical cost is theme to less manipulation because the data obtained came from actual transaction rather than from project or estimated data. The accountants just record it according to the acquired price. As a conclusion it is reported and measured objectively which helps to minimize manipulation of method of accounting data. The record of past transaction also helps managers to keep accountability and control since they are accountable to the shareholders. For using as a standard, historical cost preempt be ascertained easily and economically from past accounting records. The major(ip) limitation of historical cost is that there is no consideration of changes in price level. Financial statements prepared under historical cost accounting are composed of past data. Changes in monetary value out-of-pocket to change in general price level i s not considered.As a result it fails to provide confessedly and fair value in the financial reports. It also leads to unrealistic value of fixed assets, the most owing(p) example is a property or land. It ignores the market value and considers the acquiring cost. Depreciation is a non-cash expense it aims to create a fund to supervene upon the asset when it becomes obsolete. In historical cost accounting the calculation of depreciation is based on historical cost not on the market value so the fund available at the end of the economic life may not be sufficient for the replacement. Thus it creates meager provision for depreciation. It also creates unrealistic profit because the revenues are based on current market price whereas the expenses like depreciation is based on historical cost. As a result it overstate profit. Holding gains on inventories are included in profit.During a period of high inflation the monetary value of inventories held may increase significantly while they are being processed. The conventions of historical cost accounting lead to the unrealized part of this holding gain (known as inventory appreciation) being included in profit for the year. Moreover for companies in the service sector or which invest huge amount of capital in technology reflects poorly the true potential. According to prudence concept it accumulate all losses not profit which hide its real potential. Information based on historical cost gives a invalid trend of the company because the result are not adjusted for changes in prices. Only if the value were adjusted the compare would have been fair. Historical cost no longer reflect economic reality.