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Historical Cost

In: Business and Management

Submitted By bibipti
Words 404
Pages 2
Accounting Communication
Tatiana Egipti
ESSAY
"What are the arguments for and against continuing the use of historical costs in accounting?"

Under Historical Cost valuation method all assets are presented on the balance sheet at their nominal (original) cost at the time of their acquisition. The Historical Cost method is the method prescribed by US GAAP for use by US companies.
The proponents of the Historical Cost method often point out that one of the main advantages of such method is verifiability of initial cost information. This is true because the assets’ historical costs are based on actual transaction information, not merely estimates or hypothetical transactions. Thus, the costs are measured and presented objectively and are less susceptible to manipulation by management. There is also the Cost Efficiency advantage due to the fact that most times cost information is readily available and requires very minimal effort to obtain and verify. Additionally, determination of Historical Cost does not require any estimation by accountants and can be easily substantiated for audit purposes. Because of the objectivity of Historical Costs, information produced by accounting systems based on such methodology is easily understood by the end users.
On the downside, many critics of the Historical Cost Accounting argue that usefulness of such approach diminishes in the periods of inflation when the purchasing power of money changes while the book values remain unchanged. The higher the inflation rates, the less useful such information becomes. While some countries allow Revaluation of assets reported under Historical Cost, it does not eliminate the problem completely because not all assets will be revalued simultaneously; and the revalued assets will be added with those listed at historic costs purchased at different points in time with currency of different...

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