Limitations of Cost Concept
1. Value Relevance: Critics argue that historical cost may not reflect the true economic value of assets, especially when their market values change significantly. This can lead to an understatement of the asset value on the balance sheet.
2. Ignored Inflation: It does not consider the impact of inflation, which can erode the purchasing power of money over time. This can lead to an overestimation of the real value of certain assets.
3. Selective Applications: In some cases, historical cost may not be the most relevant measure. For example, in the case of investments in financial instruments, market values are often considered more informative.