Historical cost
Definition
 Assets should be shown on the
balance sheet at the cost of
purchase
Definition
 Assets should be shown on the
balance sheet at the cost of
purchase
 Assets are recorded at the amount
of cash or cash equivalents paid
Definition
 Assets should be shown on the
balance sheet at the cost of
purchase
 Assets are recorded at the amount
of cash or cash equivalents paid
 The value of an asset will not be
affected by subsequent changes
Advantages of the cost concept
 (1)
 Transactions are recorded objectively at
amounts which can be proved ; there will
not usually be any argument about the cost
of assets purchased from outside the
business
Advantages of the cost concept
 (2)
 The accounting income is just the
difference between realized revenue and
corresponding historical costs. This
method of measurement is easy to use and
generally accepted and understood by
various users.
Advantages of the cost concept
 (3)
 In accounting, the concept of historical
cost is consistent with the going concern,
consistency and prudence concepts.
Disadvantages of the cost
concept
 (1)
 The historical cost of assets
disclosed in the balance sheet does
not present the current value of
resources employed in the
enterprise
Disadvantages of the cost
concept
 (2)
 Historical cost is less relevant when
compared with current value.
Disadvantages of the cost
concept
 (3)
 The cost concept accounting may
produce impressions of the growth
and profitability of a business. As
the value of money changes due to
inflation, there is a continual
erosion of purchasing power.
The cars are identical,but on the cost concept,
are recorded at different costs simply by
accident of being bought at different times
 1st year ----$1000
 2nd year----$1200
 3rd year----$1500
Disadvantages of the cost
concept
 (4)
 Historical cost accounting fails to
reveal whether the company is
earning sufficient funds to enable it
to maintain its capital in real terms.
Disadvantages of the cost
concept
 (5)
 In periods of rising prices, the
trading profit is an integration of
holding gains and operating gains.