Advantages and disadvantages of historical cost accounting

NotesPaper examCBE

Advantages of Historical Cost Accounting

Advantages

  1. Cost is known and can be checked to an invoice

  2. Enhances comparability

  3. Leads to stable, non-volatile pricing

Disadvantages of Historical Cost Accounting

Disadvantage

  1. Non-current asset values become quickly out of date

  2. Depreciation charge is unrealistically low

  3. Lower costs lead to higher profits - which may lead to too high dividends in real terms

  4. Comparisons over time are impossible

  5. Users are often interested in current values not past e.g. security on loan

NotesPaper examCBE