Historical cost signified the past evidence of the cost structure of an organisation with regard to the performance of the entity. Such evidences are required in order to evaluate the present and future cost structure of the organisation in this respect and the historical based accounting is very important in regards to the preparation of the budget of the organisation. Apart from this, the historically based accounting also provides a base idea of the organisation in order to establish the fiscal studies of the organisation (Ansari & Hosseini, 2017). Beside this, another key point of the historical based accounting is the simplicity and straightness of this accounting procedure. Along with this, the certainty and tantrum of the flow of the cash is also being taken into consideration in this regards. Beside this, the statement of payment is also being precisely taken in to consideration in this respect in terms of the received amount of the cash to provide an accurate balance sheet sum (Ansari & Hosseini, 2017).
But one of the key drawbacks of such an accounting procedure is that it does not show the market value of the goods. That means, the historical cost neglect the plus value of a good. Instead of this, the procedure deals with the cost allotment rather than the actual price of the goods (Ball, 2017). In this respect, the acquisition cost of the goods are evaluation and the trend of increasing cost and depreciation is being taken into consideration in this given respect. In this regard, the current market value of the increased cost or decreased cost may or may not be higher or lower than the suggested cost of the goods (Ball, 2017).
The financial statement based on the historical cost regards the following points in order to evaluate the upcoming cost of the goods. These points are, depreciation, tax payment, net incomes and return on investing and the monetary assets (Whittington, 2016). In this regard, any one of the following points can be inflated in terms of the behaviour of the market and in this case, as the historical costs based accounting does not deal with the market value of any of the segment, the accurate cost of the goods is impossible to get in this respect due to the fact that the historical costs are not available for the accounting of these procedures, certain difficulties can be raised in this regards which will be discussed in the following context (Whittington, 2016):
One of the key impacts of inflation upon historically based accounting can be found in the fixed assets of the entity. In this respect, the fixed assets are valued at historical cost. And the figure that is being shown in the financial statement is much lower than the costs that carry the value to the asset in real terms (Ashraf, Gershman & Howitt, 2016). During a period of lifting the monetary values of a historical cost of assets, the reporting costs of the assets is being utilized with the original costs of the assets is being regarded as the original costs are being apt to minimize the fiscal place due to the increased current value. Besides this, as the current price of the objects is increased in this respect, the historically based accounting of these assets make the company vulnerable to the stakeholders in terms of lowering their ratings towards the company (Ashraf, Gershman & Howitt, 2016).
Beside this, in terms of the depreciation, due to the assets are undervalued in this given accounting procedure, the accurate depreciation amount of an assets could not be evaluated properly in this respect. By implementing such accounting procedure in the preparation of the financial statement can exaggerate the net income of the entity (Öztekin, 2015).
The use of the historical cost based accounting can also create certain deficit of hard currency in respect of the unequal finance for the future assets due to the cost that the net income of the organisation is being exaggerate in this given respect. Beside this, the extra revenue enhancement allowances are given to the particular assets of the organisation in this respect (Öztekin, 2015).
The impact of the net incomes and return on investing are overstated as gross are recorded at increased monetary value of the assets. Apart from this, the shortages of the historical balance sheet and the profit calculation are also being considered as shortages with the increased monetary value (Öztekin, 2015).
The monetary assets are also being affected with the hold of the rise in the pecuniary footing because of the rising prices in terms of the pecuniary assets of the illustration hard currency in this respect of the inflation of the given amount due to the cause of the inflation.
Ansari, Z., & Hosseini, S. (2017). Review of Accounting Practices before and During Inflation.
Ashraf, Q., Gershman, B., & Howitt, P. (2016). How inflation affects macroeconomic performance: an agent-based computational investigation. Macroeconomic dynamics, 20(2), 558-581.
Ball, R. J. (2017). Inflation and the Theory of Money. Routledge.
Öztekin, Ö. (2015). Capital structure decisions around the world: which factors are reliably important? Journal of Financial and Quantitative Analysis, 50(3), 301-323.
Whittington, G. (2016). Accounting and economics. The New Palgrave Dictionary of Economics, 1-6.