Current Development in Accounting Thought

Running head: CURRENT DEVELOPMENT IN ACCOUNTING THOUGHT
Current Development in Accounting Thought
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1CURRENT DEVELOPMENT IN ACCOUNTING THOUGHT
Table of Contents
Question 1:.................................................................................................................................2
Introduction:...........................................................................................................................2
Discussion:.............................................................................................................................2
Historical cost accounting, its strengths and weaknesses:.................................................2
CPPA, CCA and CoCoA and their strengths and weaknesses:.........................................3
Comparison of strengths and weaknesses of the identified methods:................................4
Conclusion:............................................................................................................................4
Question 2:.................................................................................................................................5
Introduction:...........................................................................................................................5
Discussion:.............................................................................................................................5
Evaluation of the proposed statement:...............................................................................5
Arguments for and against the proposed statement:..........................................................6
Conclusion:............................................................................................................................7
Question 3:.................................................................................................................................7
Introduction:...........................................................................................................................7
Discussion:.............................................................................................................................8
Reasons behind the shift:...................................................................................................8
Doubt in replacing historical cost by fair value:................................................................9
Conclusion:..........................................................................................................................10
References:...............................................................................................................................11

2CURRENT DEVELOPMENT IN ACCOUNTING THOUGHT
Question 1:
Introduction:
In accounting, the historical cost of an economic item is denoted as the original
nominal monetary value of that item. Alongside historical cost accounting, there are a
number of alternatives like current purchasing power accounting (CPPA), current cost
accounting (CCA) and continuously contemporary accounting (CoCoA). Therefore, this
section would focus on analysing the strengths and weaknesses of historical cost accounting
along with identifying whether any of the above-stated users has the ability to overcome such
deficiencies.
Discussion:
Historical cost accounting, its strengths and weaknesses:
Historical cost accounting signifies includes reporting liabilities and assets at
historical costs, which are not updated for changes in the values of the items. However, the
amounts disclosed in these balance sheet items often vary from their existing market or
economic values (Ellul et al., 2015). This method is supported by a number of arguments. It
is simple to understand and the users not having financial background could understand the
financial statements. Moreover, as indicated by Smith and Smith (2014), users do not have to
conduct market research for obtaining the market value of the financial items, since historical
cost is not subject to future changes.
However, this method has been criticised over the years by a number of scholars. As
mentioned by Palea (2014), under historical cost accounting does not reflect the true profit of
the organisation. This is because revenues are recorded on existing price; however, expenses

3CURRENT DEVELOPMENT IN ACCOUNTING THOUGHT
are recorded at the original cost leading to profit overstatement. Secondly, this concept does
not portray the actual values of assets of an organisation, as assets are recorded at the
acquisition date resulting in unrealistic values of fixed assets. Finally, under this method,
depreciation is charged on the actual fixed asset costs and they are not charged at the acquired
prices. Depreciation is deemed to be a mechanism of obtaining funds for replacement of non-
current assets. Hence, the provision of depreciation charged on the original cost would not be
adequate for asset replacement (Taplin, Yuan & Brown, 2014).
CPPA, CCA and CoCoA and their strengths and weaknesses:
CPPA:
This is an accounting model, in which the non-monetary item amounts recorded on
historical cost basis in the financial reports of an organisation are restated by applying a
general price index prevailing at the end of the accounting year. As commented by Deegan
(2014), this method assures keeping intact the purchasing capital power contributed by the
stockholders and it provides useful information based on which the management could design
effective policies and strategies for undertaking decisions. However, this method is reliant on
statistical index number that could not be utilised in an individual organisation and thus, it
becomes difficult in selecting sound price index.
CCA:
This approach gauges assets at fair market values by considering both time value of
money and inflation. Thus, it assists in recognising a number of criteria that include like
inflationary factor, changes in price level, allocation of depreciation expense and difference
between holding profit and operating profit. However, it becomes difficult to ascertain the
fair market values of assets accurately and operating profit could not be restated for depicting
real earnings.