Financial Accounting – Historical Cost Accounting

Student Name: Richard Simpson B00580164

Total Word Count:

Contents Page

Executive Summary

The purpose of this report is to analyse historical cost accounting providing information on the strengths and weaknesses, alternatives to historical cost accounting and current regulatory guidance on how to deal with the effects of inflation on the financial statements.
This report has also considered and explained the following statement:
“Historical cost accounting is used almost exclusively in practice but it is generally accepted that the resulting historical cost accounting financial statements suffer from a number of weaknesses.”

1.0 Introduction

1.1 – What is meant by historical cost accounting?

The historical cost accounting model is a measure of value in accounting that allows, ‘transactions to be recorded in the accounts at the original price. An item then remains in the accounting records at that original price until disposal’ (Alexander and Britton, 2004) even though their value may have changed over time. Historical cost accounting or commonly referred to as ‘historical cost convention’ is the ‘practice of recording the historical cost of an asset as its cost on a balance sheet’ (financial-dictionary.thefreedictionary.com, 2012).
For example, ‘assets are recorded at the amount paid to acquire them. Liabilities are recorded at the amount of proceeds received in exchange for the obligation, or in some circumstances (e.g. income taxes) at the amount expected to be paid to satisfy the liability in the normal course of business’ (Collins and McKeith, 2010).

Reference List:

Alexander, D and Britton, A (2004). Financial Reporting. 7th ed. London: Thomson Learning. p29.
Collins, B and McKeith, J (2010). Financial Accounting and Reporting. New York: McGraw-Hill Higher