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Historical Cost Accounting

In: Business and Management

Submitted By infochanlee
Words 320
Pages 2
Limitations of Historical Costing in times of Inflation
Historical Cost accounting and its significance
History of Historical Cost Accounting
Techniques of Historical Cost Accounting
Conclusion

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The impact of inflation comes in the form of rising prices of output and assets. As the financial accounts are kept on Historical cost basis, so they don't take into consideration the impact of rise in the prices of assets and output. This may sometimes result into the overstated profits, under priced assets and misleading picture of Business etc.
So, the financial statements prepared under historical accounting are generally proved to be statements of historical facts and do not reflect the current worth of business. This deprives the users of accounts like management, shareholders, and creditors etc. to have a right picture of business to make appropriate decisions.
Hence, this leads towards the need for Inflation Accounting. Inflation accounting is a term describing a range of accounting systems designed to correct problems arising from historical cost accounting in the presence of inflation.
The significance of inflation accounting emerges from the inherent limitations of the historical cost accounting system. Following are the limitations of historical accounting:

1. Historical accounts do not consider the unrealised holding gains arising from the rise in the monetary value of the assets due to inflation.

2. The objective of charging depreciation is to spread the cost of the asset over its useful life and make reserve for its replacement in the future. But it does not take into account the impact of inflation over the replacement cost which may result into the inadequate charge of depreciation.

3. Under historical accounting, inventories acquired at old prices are matched against revenues expressed at current prices. In the…...

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