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The historical cost accounting (HCA) method is a method for recording a transaction at cost. This method is generally adopted by accountants for recording transactions because the cost is the amount actually paid out for the transactions. The historical cost of transactions is objective, verifiable and can be measured reliably. However, the cost of an asset purchased some ten years ago cannot reflect its current value to the business now, especially in a time of rising prices. In other words, a company’s balance sheet cannot represent a realistic financial position of that company at the year end. The value of assets in the balance sheet merely represents an aggregation of mixed values of assets purchased at different times. As a result, the company’s financial statements will be misleading, and comparing them with prior periods or with other companies will be meaningless.
Two other measurement bases are the current purchasing power
(CPP) method and the current value (current cost accounting —
CCA) method. Under the CPP method, the value of an asset is expressed in terms of constant purchasing power at the balance sheet date by using the RPI. The advantage of this method is thatThe historical cost accounting (HCA) method is a method for recording a transaction at cost. This method is generally adopted by accountants for recording transactions because the cost is the amount actually paid out for the transactions. The historical cost of transactions is objective, verifiable and can be measured reliably. However, the cost of an asset purchased some ten years ago cannot reflect its current value to the business now, especially in a time of rising prices. In other words, a company’s balance sheet cannot represent a realistic financial position of that company at the year end. The value of assets in the balance sheet merely represents an aggregation of mixed values of assets purchased at different times. As a result, the company’s financial
Two other measurement bases are the current purchasing power
(CPP) method and the current value (current cost accounting —
CCA) method. Under the CPP method, the value of an asset is expressed in terms of constant purchasing power at the balance sheet date by using the RPI. The advantage of this method is thatThe historical cost accounting (HCA) method is a method for recording a transaction at cost. This method is generally adopted by accountants for recording transactions because the cost is the amount actually paid out for the transactions. The historical cost of transactions is objective, verifiable and can be measured reliably. However, the cost of an asset purchased some ten years ago cannot reflect its current value to the business now, especially in a time of rising prices. In other words, a company’s balance sheet cannot represent a realistic financial position of that company at the year end. The value of assets in the balance sheet merely represents an aggregation of mixed values of assets purchased at different times. As a result, the company’s financial