What is Historical Cost Accounting?
Historical Cost Accounting is a method of valuing assets and liabilities based on their original or historical cost when they were acquired or incurred. This approach records transactions at their initial value and does not consider changes in market value over time. While it provides a reliable record of past transactions, it may not reflect the current fair market value of assets and can be less informative for decision-making in rapidly changing economic environments.
Key takeaways from Historical Cost Accounting:
- Historical Cost Accounting emphasis recording assets and liabilities at their initial acquisition or incurrence cost.
- While historical cost accounting offers stability and simplicity, it may not accurately represent the current market value of assets and liabilities.
- The historical cost method is often valuable for long-term analysis.
Difference between Historical Cost Accounting and Fair Value Accounting
Valuation of assets and liabilities is an important aspect of accounting to prepare financial statements. The two basic methods of accounting are Historical Cost Accounting and Fair Value Accounting. Historical Cost Accounting emphasises recording assets and liabilities at their initial acquisition or incurrence cost, whereas Fair Value Accounting values assets and liabilities at their current market prices.
Table of Content
- What is Historical Cost Accounting?
- What is Fair Value Accounting?
- Difference Between Historical Cost Accounting and Fair Value Accounting