Historical cost accounting Essay

Advantages †¢Historical cost accounts are straightforward to produce †¢Historical cost accounts do not record gains until they are realized †¢Historical cost accounts are still used in most accounting systems Disadvantages †¢Historical cost accounts give no indication of current values of the assets of a business †¢Historical cost accounts do not record the opportunity costs of the use of older assets, particularly property which may be recorded at a value based on costs incurred many years ago †¢Historical cost accounts do not measure the loss of value of monetary assets as a result of inflation. Current purchasing power accounting Advantages †¢CPP method adopts the same unit of measurement by taking into account the price changes. †¢Under CPP method, historical accounts continue to be maintained. CPP statements are prepared on supplementary basis. †¢ CPP method facilitates the calculation of gain or loss in purchasing power due to the holding of monetary items. †¢CPP method uses common purchasing power as measuring unit. So, the comparative study is easy. †¢ CPP method provides reliable financial information for taking management decision to formulate plans and policies. †¢CPP method ensures keeping intact the purchasing power of capital contributed by shareholders. So, this method is of great importance from the point of view of the shareholders. Disadvantages †¢CPP method considers only the changes in general purchasing power. It does not consider the changes in the value of individual items. †¢CPP method is based on statistical index number which cannot be used in an individual firm. †¢ It is very difficult to choose a suitable price index. †¢CPP method fails to remove all the defects of historical cost accounting system. †¢The use of general price index for CPP method is questioned. While general price index deals with consumer goods, business is interested in the price movement of producer goods. Current cost accounting Advantages †¢More relevant †¢Provides up to date information with financial markets †¢Takes inflationary adjustments into account. â€Å"Critics have argued market value(current cost) reveals economic realities that are hidden by historical cost accounting. †¢Investors and creditors also prefer the market value accounting. â€Å"the information about the market value at the reporting date, the changes in that value and the components of that change- all provide the investors the valuable information for his decision making.† †¢In F/S, easier to view and determine whether the asset or liability is at risk or not Disadvantages †¢Unreliable   Ã¢â‚¬ ¢Volatile, when market price of an asset and liability is not available, the value is estimated (inappropriate) Continuously contemporary accounting Strengths †¢CoCoA provides information about an entity’s capacity to adapt. Chambers considers such information crucial for effective decision making †¢It solves the ‘additivity’ problem-there is a common basis of valuation (net-market values) so it makes logical sense to add the various asset values together. †¢There is no need for arbitrary cost allocations through depreciation. Weaknesses †¢Not all assets will have a readily determined market price-hence a deal of subjectively will be involved. †¢Some assets can generate income within a particular entity, but have little or no value to anybody else (for example, the case of the blast furnace). The ‘value in use’ of such assets is ignored. †¢It values assets on the basis of the separate disposal of the respective assets. The implication of this is that assets which cannot be separately sold are deemed to have no value-for example, goodwill. This attribute of CoCoA has attracted a great deal of criticism. †¢CoCoA has never had widespread acceptance within the business community and hence there would be numerous obstacles to its implementation. †¢Because CoCoA would represent a radical departure from current methods of accounting, its adoption could cause major social and economic implications. †¢People are used to preparing and reading historical cost accounting reports, hence there would be a need to re-educate them about the strengths and limitations of CoCoA-this might be costly. †¢If an entity does not expect to sell an asset, it is questionable whether the selling price is really that relevant. †¢Tied to the above point, valuing all assets on the basis of selling prices has been criticised if it is considered that the entity is a going concern. †¢Determining the market price of unique assets introduces a degree of subjectivity into the accounting process.