Historical cost accounting

Updated: Aug 20, 2021

The traditional method of book-keeping whereby all values, whether attributable to assets and liabilities or income and expenditure, are expressed in terms of the original amount expended. This means that the monetary amounts featured in published accounts are of historical relevance only and do not represent the real cost in terms of the contemporary value of money or level of prices. In times of inflation this practice can lead to a misleading picture of the health of a business.

Although the problem is recognized within the accountancy profession, no satisfactory solution has yet been found which will satisfy all concerned and which can be incorporated into the provisions of the various statutes dealing with the preparation of accounts.

Reference: The Penguin Business Dictionary, 3rd edt.

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