Limitations of historical cost accounting Financial statements prepared on the historical cost basis do not necessarily lead to a true and fair presentation of an entity’s performance or future potential if capital is not being maintained. Furthermore, actual assessment of performance through ratios such as return on capital are meaningless if profit are overstated, capital undervalued, and assets are valued under a mixture of conventions. Limitations of historical cost accounting include :
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RELEVANCE OF CORPORATE REPORTING BASED ON HISTORICAL ACCOUNTING PRACTICE HAS CONTINUED TO GENERATE INTENSIVE DEBATES OF DIFFERENT FORCES IN THE WORLD, WHICH IS ESPECIALLY TRUE IN A HIGH INFLATIONARY AND DISTORTED ECONOMY LIKE NIGERIA. DISCUSS THE STATEMENT IN RELATION TO JUSTIFICATION FOR INFLATION ACCOUNTING IN NIGERIA. NOVEMBER, 2011. INTRODUCTION Inflation account is a system of accounting which, unlike historical cost accounting takes into account changing prices. Inflation accounting
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employed to generate the pro-forma financial statement. This method involves forecasting the future turnover. Once this is done, the estimated turnover is then used to compute other accounts in the income statement and balance sheet based on its linkage to the turnover. However, this approach might not be applicable to all accounts. Hence, the base-case assumptions beneath will provide justification to this shortcoming. Turnover The turnover rates were increasing from 1999 to 2001 despite the Body Shop
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Cost is then subject to depreciation with to write off cost of the asset over its estimated useful life down to the recoverable amount ASSET AND LIABILITIES IN DOMINATED CORRENT Monetary items such as cost balance receivable and payable which are dominated in foreign currency using the closing exchange rate under IFRS. EXCEPTION TO THE HISTORICAL COST BASIS OF ACCOUNT REVALUATION OF PROPERTY PLANT EQUIPMENT Under IFRS it is acceptable, but not required to restate the values of property,
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Discussion of the issues (2.5) * Limitation of historical cost accounting Historical cost accounting: assets are recorded at the amounts paid/ received at acquisition Problem: +) inflation, +) increase in asset values are not reflected in financial statements (wearing out of assets, increase in market value) Advantage: +) objective method: documentary evidence to prove the purchase price of an asset, or amounts paid as expense. +) costs can easily be verified. * Alternative method
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1. No Consideration Of Price Level Changes Financial statements prepared under historical cost accounting are merely statement of historical facts. Changes in the value of money as a result of changes in general level of price are not taken into account. Hence, they fail to give true and fair picture of the state of affairs of the organization. 2. Unrealistic Fixed Assets Values In historical cost accounting, fixed assets are recorded and presented at the price at which they are acquired. Changes
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loss account. It involves the restatement of some or all of the items in the historical financial statement for changes in the general price level. For this purpose, approved price index is used to convert the various items of historical financial statement. This method helps to present financial statement in terms of units of equal purchasing power. Under this method, financial statements are prepared on the basis of historical cost and a supplementary statement is prepared showing historical items
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Historical-cost accounting Is a system of accounting based on the principle that assets should be valued at historical cost or historical cost is the original monetary value of an economic item. Historical cost is based on the stable measuring unit assumption. In some circumstances, assets and liabilities may be shown at their historical cost, as if there had been no change in value since the date of acquisition. The balance sheet value of the item may therefore differ from the "true" value
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inventory is viewed by users of financial statements as an asset that may be readily converted to cash if needed. In line with the historical cost principle, the valuation of inventory is solely based on the amount the inventory was purchased for. However, if the value of the inventory decreases below the original cost, then when valuing inventory the historical cost principle must not be used in this case. The reason for such a decrease in value could be for many reasons such as price level changes
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Europe. Asia. Latin America, and many other parts of the world. UNITED STATES * Influences on Accounting Development:In many ways, accounting in the United States and United Kingdom is very similar as might be expected given the importance of the historical and investment connections between the two countries. Just as the language and legal system were exported from the United Kingdom to the United States. | Cont.The securities markets are the dominant influence on accounting regulation in the United
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