This document discusses and compares historical cost accounting and current cost accounting. Historical cost accounting records assets based on their original purchase price, ignoring inflation. It provides reliable information but does not reflect current values. Current cost accounting measures assets based on their replacement cost or market value, reflecting inflation. It provides more relevant information to investors but can be unreliable if market prices are unavailable. There is debate around which method provides the most useful information to financial statement users.

1. THE PROS AND CONS
OF CURRENT COST
ACCOUNTING VERSUS
HISTORICAL COST
ACCOUTING
By: Aarifa Patel
BAT4MO

2. WHAT IS ACCOUNTING?
“The systematic recording,
reporting, and analysis of
financial transactions of a
business”
Businesses are crucial to
accounting and must
prepare financial
statements

3. WHAT ARE ACCOUNTING
CONCEPTS?
“Ground rules of accounting
that should be followed in
preparation of all accounts
and financial statements”
These rules must be followed
by accountants who work for
any business or are
entrepreneurs in their own
firm

4. WHAT IS HISTORICAL COST
ACCOUNTING?
The “financial accounting based on the
original cost of an item ignoring
inflationary increases.”
Records an asset based on its
actual value without any
adjustments for inflation
On a balance sheet the
values of assets are the
Purchase cost of the asset

5. ADVANTAGES OF HISTORICAL
COST ACCOUNTING
•Simple
•More conventional method
•More reliable and verifiable
•Information is free from any bias views (GAAP)
“Historical cost accounting leads to absolute
certainty and it fits in perfectly with the cash flow
statement. This is due to the fact that it tells exactly
what has been paid or received and therefore there
is no doubt about balance sheet amounts”

6. CONTINUED...
•Helps businesses estimate their future
costs with the help of original values that
are recorded in financial statements of past
years
•No scope for manipulation because the
data is supported by sufficient evidences
such as: invoices and receipts

7. DISADVANTAGES OF HISTORICAL
COST ACCOUNTING
•Does not provide enough information that
is relevant to investors
•Historical cost is interested in cost
distribution, not the actual values of the
asset
•Does not have any adjustments for
inflation
“an asset purchased at the current point of
time may be more expensive in future due
to inflation”

8. CONTINUED...
•The financial statements of a
business present an old interest rate
and outdated amounts
•Intangible assets are not reported in
the financial statements

9. WHAT IS CURRENT COST
ACCOUNTING?
•Also known as market value
accounting
•A “form of accounting in
which the approach to capital
maintenance is based on
maintaining the operating
capability of a business”
Mutual funds usually price
•Assets measured according to their shares daily based on
replacement cost the last trade of the day
•The adjustments called
“market-to-market”

10. ADVANTAGES OF CURRENT
COST ACCOUNTING
•More relevant
•Provides up-to-date information with
financial market
•Takes inflationary adjustments into account
“Critics have argued market value (current
cost) reveals economic realities that are
hidden by historical cost accounting.”

11. CONTINUED...
•Investors and creditors also prefer the market value
accounting
“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
with valuable information for his decision making.”
•In financial statements , easier to view and
determine whether the asset or liability is at risk or
not

12. DISADVANTAGES OF CURRENT
COST ACCOUNTING
•Unreliable
“if the information is unreliable, it should not be
used to make financial decisions.”
•Volatile
•When market price of an asset or liability is not
available, the value is estimated (inappropriate)
“Cannot provide the same relevant and reliability in
case of measuring the appreciation.”

13. QUIZ TIME!

14. 1. WHICH OF THE FOLLOWING
DESCRIPTIONS DEFINES HISTORICAL
COST ACCOUNTING?
a) Records an asset based on market
value
b) Records an asset based on its
actual value
c) Does not record any asset or liability

15. WRONG
Try again

16. CORRECT!
Historical cost accounting
records an asset based on its
actual value without any
adjustments for inflation

17. 2. IS THERE A LOT OF
DEBATE GOING ON
ABOUT THIS ISSUE?
Yes or No

18. CORRECT!
Yes, there is a lot of debate and
controversy about whether or
not to choose current cost
accounting or to stick with
historical cost accounting

19. WRONG
Try Again

20. 3. WHICH OF THE FOLLOWING
DEFINES CURRENT COST
ACCOUNTING?
a)An asset being reported at
its original value
b)An asset being reported at
its depreciation value
c)An asset being reported at
its market value

21. CORRECT!
In current cost accounting,
assets are reported at market
value

22. WRONG
Try Again

23. 4. WHICH ONE OF THE
TWO TECHNIQUES
FOLLOWS THE GAAP?
Historical cost accounting
Or
Current cost accounting

24. CORRECT!
Historical cost accounting is free
of any bias information

25. WRONG
Try Again

26. BIBLIOGRAPHY
WebFinance,Inc. (2010). Accounting. Retrieved September 22, 2010, from
http://www.investorwords.com/48/accounting.html
WebFinance,Inc. (2010). Accounting Concepts. Retrieved September 22, 2010, from
http://www.businessdictionary.com/definition/accounting-concepts.html
AllBusiness.com, Inc. (1999-2010). Business Glossary: Historical Cost Accounting.
Retrieved September 24, 2010, from
http://www.allbusiness.com/glossaries/historical-cost-accounting/4948578-1.html
Scribd. Abdul Ahad. (2010). Is Market Value the Best Alternate to Historical Cost?
Retrieved September 25, 2010, from
http://www.scribd.com/doc/17844489/Market-Value-vs-Historical-Cost
The Gale Group, Inc. (2010). Dictionary definition: Current Cost Accounting. Retrieved
September 24, 2010, from
http://www.highbeam.com/doc/1O18-currentcostaccounting.html
Suite101.com. James Hutchinson. (2009). Market-to-Market Accounting Pros and Cons:
Why it is Important how Investments are Valued. Retrieved September 24, 2010, from
http://www.suite101.com/content/marktomarket-accounting-pros-and-cons-a101861