Question

3. The HC method, which uses unadjusted historical costs, does not consider depreciation expenses, purchasing power, and unrealized gains in replacement value. Despite these weaknesses as a financial reporting method, the HC method is used more frequently for accounting purposes than other methods, such as the HC-GPL, CV, and CV-GPL methods. Why is this so?

Answer 1

Accounting is concerned with past events and it requires consistency and comparability that is why it requires the accounting transactions to be recorded at their historical costs. This is called historical cost concept. Historical cost is the value of a resource given up or a liability incurred to acquire an asset/service at the time when the resource was given up or the liability incurred. In subsequent periods when there is appreciation is value, the value is not recognized as an increase in assets value except where allowed or required by accounting standards. The historical cost principle is a basic accounting principle under U.S. GAAP. Under the historical cost principle, most assets are to be recorded on the balance sheet at their historical cost even if they have significantly increased in value over time. Not all assets are held at historical cost. For example, marketable securities are recorded at their fair market value on the balance sheet, and impaired intangible assets are written down from historical cost to their fair market value. Valuing assets at historical cost prevents overstating an asset's value when asset appreciation may be the result of volatile market conditions.marketable securities are recorded at their fair market value on the balance sheet, and impaired intangible assets are written down from historical cost to their fair market value. Valuing assets at historical cost prevents overstating an asset's value when asset appreciation may be the result of volatile market conditions. The HC method of reporting is regarded by many as the most objective method of accounting and is consistent with the accounting principles of cost valuation. It is and has been widely used and is therefore widely understood by many. Periods of rapid inflation or deflation can however violate the accounting principle of a stable monetary unit. For the above reasons despite of the weakness HC method is frequently using for accounting methods.