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Advantages and Disadvantages of Historical Cost
Accounting
By Kevin Thompson
Published Jan 06, 2007
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Accounting concepts and conventions as used in accountancy are the rules
and guidelines by which the accountant lives. The historical cost accounting
convention is an accounting technique that values an asset for balance
sheet purposes at the price paid for the asset at the time of its acquisition.
The historical cost accounting is the situation in which accountants record
revenue, expenditure and asset acquisition and disposal at historical cost:
that is, the actual amounts of money, or money's worth, received or paid to
complete the transaction.
Historical costs
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Historical cost is a generally accepted accounting principle requiring all
financial statement items be based upon original cost. Historical cost
means what it cost the company for the item. It is not fair market value. This
means that if a company purchased a building, it is recorded on the balance
sheet at its historical cost. It is not recorded at fair market value, which
would be what the company could sell the building for in the open market.
Criticisms of the historical costs method
Historical cost method, over a period of time has been subject to many
criticisms, especially as it considers the acquisition cost of an asset and
does not recognise the current market value. Historical costs is only
interested in cost allocations and not in the value of an asset. While it tells
the user the acquisition cost of an asset and its depreciation in the following
years, it ignores the possibility that the current market value of that asset
may be higher or lower than it suggests.
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