Evolution of Accounting Principles

This assignment delves into the evolution of accounting principles, examining different methods like historical cost, current purchasing power, and fair value accounting. It analyzes the characteristics, advantages, and disadvantages of each method, highlighting how they contribute to transparency, neutrality, and accurate financial representation. The paper also explores the reasons behind the shift from older methods to the currently dominant fair value approach.

Running Head: CURRENT DEVELOPMENT IN ACCOUNTING AND THOUGHT
Current Development in Accounting and
Thought
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Ans.1:
The conceptual framework helps in determining the concepts and the purpose of
financial reporting. It helps the board in the preparation of accounting policies and concepts
which are required to be followed consistently. The aim of general purpose financial
statements is to highlight information with respect to the company’s performance, its cash
flow, and its financial position. These principles are in line with the theme of the conceptual
framework. They provide assistance by means of policies and concepts which help in the
preparation of financial statements. The objective of financial reporting provides the required
information to its users so that they can make decisions based on it. The purpose of users is
also linked to it. They want to ensure transparency from the end of the companies through
their financial information (IFRS, 2017).
Consistency, reliability, comparability, and relevance are the qualitative
characteristics of accounting. These are the actual expectation of the intended users from the
companies preparing financial statements. The objectives of measurement in accounting are
to show a true and accurate picture of the company’s financial position. Both, the qualitative
characteristics and the objectives are connected to each other because their basic aim is
transparency (IFRS, 2017).
The role of relevance is to make the material relevant which can assist in decision
making. It is the interconnection which connects the past data with the future predictions.
Faithful representation affirms the business activities as genuine. It speaks for its accuracy
with respect to the company’s financial position. Faithful representation stands for more level
of importance. This is because it is not enough if the information is just relevant. It should
vouch for its completeness, neutrality, and error- free course of nature (Bragg, Relevance
definition, 2013).
Relevance is crucial but faithful representation is an obligation. For example, if a
business concern is having debtors of $21,542, it can be cross verified with the help of future
forecast and past data. But, if the company fails to fairly represent it in its financial
statements, the ultimate aim of the conceptual framework will fail. This is the importance of
fair representation which requires the reflection of accuracy. Currently, the companies are
failing in fairly representing their financial aspects to its users. Apart from the need for

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accuracy, it is required to follow the accounting policy with relevant disclosures. The area of
faithful representation is quite broad in nature as compared to relevance (Bragg, Faithful
Representation, 2014).
If a company follows relevance but fails to comply in faithful representation, it fails to
achieve the objectives of the general purpose financial statement. Even IAS 1, Presentation of
Financial Statements affirms for the concept of fair representation. The aim of the faithful
presentation is in line with the purpose of an accounting standard. It asks for accurate
information and true disclosures. It is important that the information should be just and fair
with proper disclosures and free from error. The same is the basic need of any accounting
standard (Charterededucation, 2017).
In this era, the need for disclosures has increased. It is due to this information, major
decisions are being made by its intended users. Today, the stakeholders are not just interested
in the financial information, they do look for non-financial information as well. This is why
our accounting standards are being regularly updated as per the needs of the business
environment. The importance of faithful representation has increased to such an extent that
even the controllers of financial statements disqualify such information in its absence. In our
diversified business environment, which is growing and developing, it can be said that
faithful representation is now a necessity and not just a part of the conceptual framework
(Bragg, Faithful Representation, 2014).
Right from the stakeholders to the board and the due compliance of government, all of
them expect faithful representation from a company’s financial statements. In today’s
scenario, if the information shared by the companies are not complying faithful
representation, such will have a severe question on its survival. Because today’s world expect
transparency and if the companies are unable to provide that, it will not exist in the long run.
So, it is quite crucial, to keep the stakeholders and other connected persons in confidence to
survive in the long run (Bragg, Faithful Representation, 2014).
It is quite possible for the accounting to achieve faithful representation because the
conceptual framework along with the accounting policies and standards supports it. It is still
difficult because some fraudulent companies still exist who bypass such framework. But to
have a reputed brand image, it is now a necessity to reflect faithful representation in financial
information. For this, better compliance rules and procedures are being formulated so that its
base becomes stronger (IAS, 2017).

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Ans. 2:
A normative theory defines the way of the accounting process. It evaluates various
kinds of approaches in order to frame one form of accounting opinion. Historical Cost
Accounting (HCA) aims to analyze income on the basis of value and not the cost component.
It had its own set of benefits and limitations. Data which used to follow this type of
accounting was error free and properly verified. It was the only recognized accounting system
which was widely accepted for the purpose of taxation. Its limitations are it works on the
principle of the firm monetary unit which ignores the concept of inflation. It also fails to
match the current revenue with the same level of cost (Nandwani, 2017).
Current Purchasing Power (CPP): This normative alternative to HCA has its pillar on
a price index. The utility of such price index is to adjust the prevalent purchasing power. As
far as the assets are concerned, CPI (Current Price Index) is considered. For example, if the
valuation of an asset is required, a particular price index can be adopted and then CPI is used
for the purpose of required adjustments. These consider and have its impact only on the
financial items and fails to consider the non-financial items. The same gets reflected in the
financial information (Accounting-Management, 2017).
Current Cost Accounting (CCA): This form of accounting believes in the replacement
cost when it comes to non-financial matters. The end result is that it redefines the value of an
asset. The issue is it does not consider the impact of inflation in it while analyzing the profit.
For example, a furniture cost $300,000 with a life of ten years and no salvage value and
depreciated $30000 every year by straight line method. Now, if its replacement cost is $
320,000, its depreciation per year will be $ 32000. Thus, this $ 2000 (32000-30000), will be
deducted in order to arrive at CCA (AccountingManagement, 2017).
Continuously Contemporary Accounting (CoCoA): This principle works on the basis
of the current cash price. For example, if any asset has been sold for $ 1300 but its net
realizable value is $ 1500, as per this principle of accounting, it will be measured at $ 1500.
This method fails to differentiate between the unrealized and realized profits. It adjust the
figures of financial information on the basis of general purchasing power (Chambers, 1967).
As far as the current purchasing power is concerned, the pillars of accounting cannot
work on the basis of the single price index. This is because a single price index cannot justify
a true value of all kinds of asset. It cannot compensate its true value in a real way. Plus, it

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also costly and takes a lot of time. The replacement cost method of current cost accounting
fails to highlight the actual selling price of an asset. What it reflects is its buying price which
is different in nature. The concept fails to complement the specialized assets. This, in turn,
leads to a costly mechanism which requires efforts of extreme nature in order to find out the
actual replacement cost (Nandwani, 2017).
Continuously Contemporary Accounting (CoCoA) succeeds on the basis of
subjectivism but fails to comprehend the practical nature. The problem arises in the valuation
of assets because the market price is not available for the specialized ones. The value in use is
nowhere recognized in this principle and even does not recognize goodwill on its actual price
under the impression that it cannot be sold in an individual form (Chambers, 1967).
When it comes to analyzing which one of them was successful, the answer is quite
twisted. The purpose of being successful is associated with the compliance of transparency,
neutrality, error free, consistency and going concern. As per the current position, the
historical cost of accounting is not used much because of the development in the modern
concepts. As and when, the principles of accounting has evolved, from time to time, such
method has been employed and was successful (Nandwani, 2017).
It was Current Purchasing Power which was successful in the absence of
Continuously Contemporary Accounting and current cost accounting. In the same manner,
current cost accounting and Continuously Contemporary Accounting had their own time
period of being successful. Due to its failure in recognizing the importance of neutrality,
transparency and other relevant parameters, historical method is not much in use. Thus, the
fair value of accounting is being followed at today’s time. It measures the actual time with
the real value of money. It is the pillar of today’s and tomorrow’s form of our accounting
(IASplus, 2017).

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References
AccountingManagement. (2017). Meaning and Characteristic of Current Cost Accounting. Retrieved
from Accoutning-Management: http://accountlearning.blogspot.in/2011/06/meaning-
features-and-objectives-of.html
Accounting-Management. (2017). Meaning and Characteristics of Current Purchasing Power.
Retrieved from Accounting-Management:
http://accountlearning.blogspot.in/2011/06/meaning-and-characteristics-of-current.html
Bragg, S. (2013, March 12). Relevance definition. Retrieved from Accounting Tools:
https://www.accountingtools.com/articles/what-is-relevance-in-accounting.html
Bragg, S. (2014, September 22). Faithful Representation. Retrieved from Accounting Tools:
https://www.accountingtools.com/articles/what-is-faithful-representation.html
Chambers, R. (1967). Continously Contemporary Accounting. The Accounting Review, 42(4), 751-757.
Retrieved from http://www.jstor.org/stable/244170
Charterededucation. (2017). Accounting Policies - Fair Representation and Faithful Representation.
Retrieved from Chartered Education: http://www.charterededucation.com/ifrs/accounting-
policies-fair-presentation-and-faithful-representation-for-ifrs/
IAS. (2017). IAS1 - Presentation of Financial Statements. Retrieved from Ias Plus:
https://www.iasplus.com/en/standards/ias/ias1
IASplus. (2017). Conceptual Framework of Reporting. Retrieved from IAS Plus:
https://www.iasplus.com/en/standards/other/framework
IFRS. (2017, August 27). Conceptual Framework. Retrieved from IFRS:
http://www.ifrs.org/projects/work-plan/conceptual-framework/#about
Nandwani, M. (2017). HCA - meaning, benefits and limitations. Retrieved from Accounting Notes:
http://www.accountingnotes.net/historical-cost-accounting/historical-cost-accounting-hca-
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