Historical cost accounting Essay Example for Free

Historical cost method of accounting EssayAdvantagesHistorical cost accounts argon straightforward to lift Historical cost accounts do not record gains until they be realized Historical cost accounts are still wontd in most accounting systemsDisadvantagesHistorical cost accounts give no characteristic of current economic set of the assets of a business Historical cost accounts do not record the probability 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 purchase originator accountingAdvantagesCPP order adopts the same unit of measurement by taking into account the legal injury changes. Under CPP method, historical accounts continue to be maintained. CPP statements are prepared on supplementary basis. CPP method facilitates the computer science 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 monetary information for taking management termination 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.DisadvantagesCPP 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 use up a suitable charge index.CPP method fails to remove entirely 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 concerned in the price movement of producer goods.Current cost accountingAdvantagesMore relevant Provides up to date information with financial markets Takes inflationary adjustments into account. Critics have argued market value(current cost) reveals economic realities that are hidden by historical cost accounting. Investors and creditors also prefer the market value accounting. the information about the market value at the reporting date, the changes in that value and the components of that change- all provide the investors the valuable information for his decision making. In F/S, easier to view and determine whether the asset or liability is at risk or notDisadvantagesUnreliable Volatile, when market price of an asset and liability is not available, the value is estimated (inappropriate) Continuously contemporary accountingStrengthsCoCoA provides information about an entitys capacity to adapt. Chambers considers such information crucial for effective decision making It solves the additivity problem-there is a common basis of valuation ( net-market values) so it makes logical sense to add the mixed asset values together. There is no need for arbitrary cost allocations through depreciation.WeaknessesNot all assets willing have a readily determined market price-hence a deal of subjectively will be involved. Some assets can generate income within a particular entity, but have myopic or no value to anybody else (for example, the case of the blast furnace). The value in use of such assets is ignored. It values assets on the basis of the separate disposal of the respective assets. The implication of this is that assets which cannot be separately sold are deemed to have no value-for example, goodwill. This attribute of CoCoA has attracted a great deal of criticism. CoCoA has never had far-flung acceptance within the business community and hence there would be numerous obstacles to its implementation.Because CoCoA would constitute a radical departure from current methods of accounting, its adoption could cause major soci al and economic implications. peck are used to preparing and reading historical cost accounting reports, hence there would be a need to re-educate them about the strengths and limitations of CoCoA-this might be costly. If an entity does not expect to sell an asset, it is questionable whether the selling price is really that relevant. Tied to the above point, valuing all assets on the basis of selling prices has been criticised if it is considered that the entity is a going concern. find out the market price of unique assets introduces a degree of subjectivity into the accounting process.