Historical cost accounting is meaningless in todays complex business Essay

Historical apostrophize accounting is meaningless in todays complex business environment - study ExampleHistorical bell accounting and its alternatives have uses for different firms, marts, steering and investment strategy, and auditing approaches, and there is no reason why they massnot both be employ even within the same financial report Historical Cost Accounting Summary Historical cost accounting is the process of accounting establish on the historical value of an asset at the time of purchase after taking into account depreciation (Williamson, 2003 National Audit Office, 2009, 88). Historical cost accounting was once a near-universal standard, but now many different standards may threaten coherence (Cao). Disadvantages Historical cost accountings do have estimable limits, and they deserve to be addressed. First Depreciation is arbitrary because its based on out-of-date values and estimations rather than any real benchmark (Greuning and Koen, 2001, p. 47). The depreciation charges dont annihilate up making a realistic estimation of the actual replacement cost either. However, aside from the advantage of keeping the information all self-contained, historical cost accounting also tends to report information from the firms perspective This asset was bought at price X and term Y. Second Profits will be magnified because actual trading will involve replacing assets, which centre giving up old assets which be undervalued (Gruening and Koen, 2001, p. 47). However, not all assets are fungible at full price. Historical cost accounting has the advantage that it lets the company recall what the product was worth at any given time. Third There are possible negative tax implications (Gruening and Koen, 2001, p. 47). Overstating profits by undercharging the depreciation value (e.g. if I buy land twenty years ago, the depreciation isnt on the market value at that time but the value of the land latestly as it depreciates or appreciates) and charging cost based on the historical costs of inventories can cause higher tax charges. The value of labor is also not included or developed by historical cost accounting (Stovall, 2001, p. 2-4). traditional accounting theories, in line with neoclassical economic theory, tend to view everything that is quantifiable as all that makes up an economy (Stovall, 2001, 2-4). Human capital, which is harder to measure and has egress rates which are not easily predictable, do not easily fit into the model and thus are jettisoned. Then again, Stovall (2001, p. 2-4) makes clear that fair value, current purchasing power and net present value accounting do not do this either. The failure to account for inflation, aside from the other problems already discussed, means that the firm may not be protecting its capital base (Gruening and Koen, 2001, 47). It also makes it hard to benchmark performance because different market conditions arent being accounted for, allowing management to sit on their laurels since its dif ficult to see if the companys value is really growing even after controlling for inflation. That having been said, inflation-keyed metrics can lull investors into a false sense of security (Fukui, 2003, p. 2). In fact, it may not be fair to measure executives against inflation of the market in general, given that the market is a cross-section which includes a mixture of high and low risk growths whereas individual firms are not. Another issue