Historical Cost Accounting Method Assignment

Added on - 29 Apr 2020

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Running head: HISTORICAL COST AND CURRENT COST ACCOUNTINGHistorical Cost and Current Cost AccountingName of the StudentName of the UniversityAuthor’s Note
1HISTORICAL COST AND CURRENT COST ACCOUNTINGPart 1: Definition of Accounting MeasurementIn the area of accountancy, Accounting Measurement is considered as an important area.Accounting Measurement refers to the process of computing various financial or economicactivities in terms of money, hours and others units. In the other words, accounting measurementrepresents various units of measurable elements that are largely used for the comparison andevaluation of different kinds of accounting data. It can be seen that business organizations allover the world use different basis for accounting measurement. Some companies use money asthe basis of accounting measurement and some companies use units as the basis of accountingmeasurement (Kanodia & Sapra, 2016). For example, it can be said that a single company canuse both money and units for accounting measurement. The company can record the monthlysales of them based on money that is $50,000. The same company has the option to recode themonthly sales based on units that is 25,000 units$2 per unit.Thus, from the above discussion, it can be observed that accountants have the option toquantify accounting based on money; at the same time, they also have the alternative option torecord accounting based on units, number of labor hours, number of created jobs and others.There is a major advantage of using different types of bases for accounting measurement as itprovides the accounting managers of the companies with better view of the overall financialhealth of the companies. For the ease of understanding, another example can be used. A businessorganization has recorded $100,000 as the monthly sales of them; this will be considered asaccounting measurement in the form of US dollars. However, the organization also has theoption to record their monthly sale based on hour’s world or jobs created or others. However, itneeds to be mentioned that business organizations need to take accounting measurementdecisions after considering all required factors; otherwise, it can increase the capitalrequirements of the business organizations (Barth, 2013).Part 2: Historical AccountingAll over the world, Historical Cost Accounting is known as Conventicler Accounting.According to the techniques of historical cost accounting, all the organizational assets exceptinventory are recorded in the books based on their historical cost; but the liabilities of the
2HISTORICAL COST AND CURRENT COST ACCOUNTINGorganizations are recorded in the books based on their payable value. In addition, the expensesare recorded based on historical cost while incomes are recorded based on current prices. It canbe seen that historical cost accounting has received many criticism for various reason and at thesame time, has also received many praises. The following discussion shows the main argumentsfor and against the process of historical cost accounting.As per the techniques of historical cost accounting, deprecation is charged on the fixedassets of the organization. Under this process, the total amount of depreciation of the assets overthe full lifetime is equal to the original cost of the assets in the absence of any scrap value. Thus,there should not be any problem in the valuation. However, over the whole lifetime of the assets,there can be reduction in the market prices of the assets due to various reasons like inflation andothers. Many authors argue that historical cost accounting undervalues current or market price ofthe assets and thus, it does not consider the impacts of monetary price changes. However, manyaccountants have stated for the historical cost accounting that it is the reluctance oforganizational accountant to consider the market value of the assets. They have found by statingthat the reluctance of the accountants to consider the market price affects the share price of thecompanies (Ellul et al., 2015). Many authors have mentioned that the adoption of historical costaccounting diminishes the possibility of the manipulation of data. This can be considered as onemajor advantage of historical cost accounting.Under the process of historical cost accounting, cost of inventory is recorded based on themarket price and sales are shown based on the current purchasing power of money. Thus, manyauthors argue that due to this process, the profit shown in the financial statements of thecompanies does not correctly show the actual status of the company’s wealth. The main reason isthat historical cost accounting does value the inventory based on their current market value. Thiscan be consider a major limitation. However, by arguing for the historical cost accounting, manyauthors have mentioned that historical cost accounting put major focus on actual transactionsrather than projections as it has association with better organizational control. Under the processof historical cost accounting, there is not any scope of personal partiality on the part of theaccountants. Under the process of historical cost accounting, the figures represent the actualvalue of the fixed assets of the companies (Drury, 2013). Hence, based on the discussion, it can
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