Advantages and Disadvantages of Historical Cost Accounting Essay

Historical cost accountancy has been a controversial regularity that experienced some(prenominal) criticisms over a period of time, oddly since it considers the acquisition cost of an asset and does non recognize the on-going securities industry value. Merits and demerits of this manner are as follows.The near writ bounteous advantage of HC accounting is objectivity. It is a preponderantly objective system, which records the original cost of an breaker point when it was purchased. Under historic cost accounting in that respect is no room for utilization and the data is supported by fissiparous documentary evidence, such as invoice, statement, draw off counterfoil, receipt or voucher.Elliott and Elliott43 any(prenominal) other method for recording proceeding would be less objectives since the amount organism recorded would depend on soul point of view and is various from contrary people.Secondly, being compared with most other methods, historical cost is an easier and cheaper way of valuation. In value that the original cost is unmatched that already existed and could not be amended, which is easy to desexualize and can be verified. Therefore, it requires less mind for accountants to record the data and easier for auditor to behold them subsequently. In addition, as a root of fact, it is verifiable and to that extent is beyond departure. (Alexander and Nobes 180)Another significant advantage of it is reliability, which is one of the key characteristics of financial account, as examined in the IASBs Framework. As a ult value, for most assets historical cost is to a greater extent reliably determined than other current valuation such as clear value. This measuring stick can ensure that there are not excess benefits to users. (Alexander and Nobes181)Unfortunately, as every coin has two sides, HC accounting also can not overturn having drawbacks. The main injustice exists in the subsequent days after acquisition. The continued report ing of historical cost based value does not reflect any changes in market value. Therefore either IASB rules or US GAAP are not based on the HC principle univocally. Actually, the measurement model used by these standards, interchangeable IFRS, is a mixture of historical be,market values, net realizable values and discounted amaze values. Walton and Aerts76Moreover, although HC accounting method is reliable, the enigma mentioned above lead to another disadvantagelack of relevance, which is also a spanking characteristic of financial reporting for decisions makers. As we know, making decisions normally requires estimation of the incoming, particularly the prediction of cash flows. (Alexander and Nobes181). However HC method is based on the past values, and so can not provide the most relevant information for the future. It may not be the best guide to the future performance, financial status and investment potential. (Alexander, Britton and Jorissen867)In addition, although this method is predominantly objective, it can be broke by some especial(a) situations, owing to alternative translations of revenue and costs and the need for estimates. Revenue and cost could be determined according to a preference of criteria. For instance, although inventories are valued at the land of cost or net realizable value, the cost will differ depending upon the definition adopted, like first-in-first-out or last-in-first-out cost.Assets are often subjected to revaluation. In an economy of changing equipment casualty levels, the historical cost system has been compromised by a perceived need to double the carrying value of those assets that comprise a large proportion of a companys capital employed such as land and buildings.Elliott and Elliott44ReferenceB. Elliott and J. Elliott, 2009, monetary Accounting and account ,13rd edition, FT scholar lobby , Essex D. Alexander, A. Britton and A. Jorissen, 2007, multinational Financial Reporting and Analysis, 3rd edi tion , Thompson Learning , capital of the United Kingdom. P. Walton and W. Aerts, 2006, world(a) Financial Accounting and Reporting Principles and Analysis, Thomson Learning, London D. Alexander and C. Nobes, 2004, Financial Accounting An International Introduction, 2nd edition, FT Prentice Hall , Essex