ACC518 | Define Historical Cost Accounting | Accounts

Home Assignment Answers ACC518 | Define Historical Cost Accounting | Accounts

What is the meaning of historical cost?

Historical cost is defined as an original cost related to an asset which is recorded in accounting records of an entity. Several transactions that are recorded in the accounting records of the company are stated in their overall historical data. The concept related to historical cost is cleared by the cost principles, which defines that an individual can only record the liability, asset or equity investment at its original acquisition cost. A historical cost can be simply proven only by accessing the trade documents or source purchase. However, the historical cost has the limitation of not essentially representing the actual fair value regarding an asset that likely to depart from the purchase cost over time. As per the standards of accounting, the historical costs need some amendments as time passes. It is recorded the depreciation expense for the long-term asset, thereby decreasing the stored value over estimated essential and useful lives.

Simply, the historical cost is defined as a measure of value that is utilized in accounting in which the cost or price regarding an asset on the balance sheet is based on the original cost or nominal cost when obtained by the organization. The mechanism called historical cost mechanism is utilized for assets in US (United States) under GAAP (generally accepted accounting principles).

Historical Cost Accounting

HCA (Historical Cost Accounting) is also known as conventional accounting that records transactions which are appearing in the balance sheet as well as the loss the profit account in the monetary accounts which reflect historical costs, which is the prices that are the output related to the transactions of the length of arms. The principle related to historical cost needs that the records of accounting are maintained at the original transaction prices and that overall values are retained during the process of accounting to offer as the basis for the values in the statements of finance, i.e. financial statements. HCA (Historical Cost Accounting) is based on the realization principle that needs the recognition regarding the values when it has been recognized.

Advantages of Historical Cost Accounting

Some of the major benefits of HCA (Historical Cost Accounting) are as follows:

  1. Historical accounting decreases to a least the extent to which the overall account can be influenced by the personal judgments regarding the individual who prepare them. It gives the data which is very less disputable.
  2. Objectivity is one of the major advantages of Historical Cost Accounting. It is a predominantly objective system that records the original cost regarding the item when it was purchased.
  3. Historical cost is known as cheaper and easier method of valuation as compared to other methods.

Other major advantages of HAC are:

  • Improves comparability
  • Leads to non-volatile and stable pricing
  • Cost is known and can also be examined to an invoice

Disadvantages of Historical Cost Accounting

Some of the major limitations of HCA (Historical Cost Accounting) are as follows:

  1. The values regarding non-current asset become out of date very quickly.
  2. Depreciation charge is unrealistically very low.
  3. It is impossible to comparisons over time.
  4. Some of the users are frequently interested in existing values, not the past. For example security on loan.
  5. In HCA (Historical Cost Accounting), there is a lack of relevance which is considered as one of the major drawbacks of it.

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