Methods ot Account1y • Seoo¥ of a Serie8 t
R. J. £haeMn
ty.storioal Oost A.ccount1!!c
use ot h1atorloal coat. as the ba818 ot. ,aDCOUIIU,ac i. wi4elT
,r
belie...... to be a ~ ena~liahei priDoiple. 'l'hejOoapaide. Aot.
m.e.ke certain retezwnoea to the oo.t. ot &8Set8, 'but 1t 1. llOWhen
speoU"1ecl that aooount1Dc ahall ....
'17 rete1'aOe oalT to tho..
cons. There 18 1nclee4 an overriclinc provia1oa: '~:'149(3» whioh
require8 that the haJ.aaoe sheet ... protit ... 1088 aoooaat ahall gift
a trua aDIl tair view ot the lItate ot atta.1Z'8 aa4 the profit. ot a
period.. So that in taot aooountants are len to 4eoicJe what hasio
ticures wU1 lead to trne ancl tair repreaentatiou. In the Unit..
State. the use ot his""-torioal
cost is more tJ.rml.7 entJ.'eDOhH 117 virtue
'-'
of the Saouritie. Act anciS-~EhOil ftculati-..·· But men usage does not
necessarUY' establish the propriety ot a _tbod. of aooountlng.
'l'be
i!"
,~.
,-/
-
r
;
'{
.~. t,-,
"OM
1t as UIl1IeOessar.r to "BCribe the processes or
hi8torioal. oon (or initial price) aooount1nc. We oan prooefHl to
4180U88 it 'by rete1WlOe to 80M ot the example8 uaea. in the first
a.rticle ot this se1"1e••
'fe wUl taD
It wUl be raoall_ that Oase 4 was a oase in whioh there were
ftO tranaaotiou, no ohanps in price. ancl A. held 6Oo4s onlY', naae17 a
pieoe ot land. We theft stipW.ated that the a811W price of the laM
was the sau at the begiD,nlDg &8 at the ad ot the 7&ar. '!'he
thus doe. not embraae the pe1"104 in whioh the Wt1al price of the
Itm4 oocura. Suppose that the laad. was bought tor £80 cluriD« the yeaended 31 December 19%0. It the aelliDg prioe was £100 at the latter
date, thea clearl7 A. w.. 'better ott by t.2O than 'betore he bought the
I d . A would oerta.inlT not think he waa onJ.T as well ott as 'betore •
0_
.
-
THE
ACCOUNTANT
March 5th, 197'0
tion to keep pace with inf-lation. Thus, over the long
term it is hoped that the original capital sum should a.t
least maintain its purchasing puwer.
Whdher the funds of a duritahlc tru,;t are invested
in the Charities OHlcial Investment Fund or in anv
other way, thett' it; much to be said in favour of arrang'1m! for the investment to be made and administered
by~ the Official Custodian for Charities. 1'~() charge is
made tor this service and there is no doubt that by
taking this action trustees can save themselves a;1
<lpi)reciuble amount of p'aperwork. Perhap", however,
the most important advantage of this arrangement is
that th~~ Official Custodian :.tlltomuticallv reclaims all
recoverable tax deducted from dividend~ :.l!ld interest
on funds which he holds.
341
In the case of United Kingdom tax, the normal
positiun is that the Official Custodian is able to remit
the gross amount of the dividend or interest payment
to the trustees on the same day onwhi<:h he receives the
net Jivideml, or very soon afterwards. This both
relieves the trustee of the necessity of claiming from
the Inland Rcn;Hue ;111<.1 also eliminates the time-lag
which would occur before the repayment was received.
All in a1\, it can be ~)een that for anyone accustomed
to contributing to charitable causes - even on a fairly
modc::;t scale "the formation of a charitable trust can
have the cHect not only of introducing some discipline
into their giving, but can also increase very substan~
tially the amount \vhich they can donate to descrving
causes.
METHODS OF ACCOUNTING ·-Ii
Historical Cost Accounting
and its Variants
by R. ,J. CHAMBERS
Professor of Accounting. University of Sydney
TI-IEwidely
usc. of
histnriCil
L."Ost;l
a1> the hasi:.; of <l.l:countin g
is
bdKWd to bl~ a firmly established principle., The t'niled Kingdom Companies Acts make
certain references to the cn,;!::; of a:3scts, but it is
nowhere specified that accouming shall h,: done by
reference only to those costs. There is, inJeed, an overriding provision ("ection 1+9 (3)), which [-cquires that
the balance sheet and profit and ](.IS5 GCCOl.mt shall
gi,"e a true ;md fair view of the Sf"tc uf affairs and the
pnsll ts of a periuJ. S() that, in fact, <It:countants arc
left to decide "hat ba;;ic tigures will lead to true and
tilr repre,;entatiol1s.
1n the l1nited :::;tates the us,; of historical cost is
more firmly entrenched hy virtue ()f the Sccurities Act
and Securities and Exdungc Comm.lssl01l n:guhtioI)s.
But mere usa\?:c docs nut ncce""arllv establisb the
propridy of a ";ltthod of accuunting. '
It is here taken to be unncces;;ary to d('~~cribe the
processes of historicdl cost (or in i1 ial 11ricc) accounting.
\Ve can procceJ 10 discuss it bv refcn:nce to SOlD(: of the
exampk's u;;ctl In the first arti'cJe of trlls ;;eries.
It \.\iH be recalled that Case 4 was a case ill which
there were no transactiun~, 110 changes in price:, and
A bcld goods only, namely, a piece of lamL We thert:
stipulated that the ulling price of the iand was the same
"t the beginning as at the end of the year. The case
Lll\li> does not embrace the period in which the initial
price of the Jand occurs. Suppose that the land was
bought for [,'ilo during the year trukd December 31:,t,
HJXO. If the selling price was ;)00 at the latter date,
then dearly _" was better off by £:20 than before he
bought the land. A would certainly not think he was
ollly as well off as before. He could sell the land for
rnore tban he paid; he could borrow more on an asset
worth L>oo than OIl'': worth £80. To show the land at
[Ho would be to show that he was no better off, It
Wl)U ld be as if land had a nortlinal pri(;e tag attached to
it in the same way as a £1 note has a nominal vallIe.
And, of course, this is not so.
The process of buying things with mon.~y in the
expectation of being better off is characteristic of our
commercial actions, even if we are private persons.
It is certainly the object of the buying done by trading
firm,,,. Firms buy goods because they expect to be
bdtef off by buying than by not buying. The partieu lar
status of each in the chain of organized di.,;tribution
puts each in its own particular position of benefit
from its purchases. "Whether a firm is better off by
virtue of '.vhat it holds at one time by comparison with
its holdings at another is what we expect a statement of
n:~sults to show. It \-vill be recalled that bv 'better ofl"
we mean able to buy more goods in general than before.
'Ve make no reference whatever to any kind of 'psychic
wcll-oHness'; accounting is concerned with well-ofTness
in a purely economic or commercial sense.
If A owns land only, how well oft he is vvill be given