ACC THEORY

3. The five reasons for dominance of Historical Cost Accounting. The first reason is It has to do with
making economic decisions. It enables users to compare one asset to another within the same
business or across industries. For example, a manager may require historical transaction data in
order to make a decision. Previous prices can be used to forecast future prices. Past prices can be
used to predict future prices. It allows users to compare one asset with another asset within a
company or across an industry. The second reason is that It's simple to verify. Actual prices at the
time of the transaction are used to calculate historical costs. External parties, such as auditors, can
easily verify the balance sheet costs. All they have to do now is link it with supporting papers like
invoices and contracts. The next reason is Useful. Recording historical expenditures over a long
period of time can reveal price increases over time. There's also the reality that records are more
trustworthy because they're backed up by substantial documentation like invoices and contracts.
Last but not least, Understandable. It is the most easily comprehended idea of profit or loss when
using historical costs. Profit is just a measurement of income less any expenses. It is also simple for
the accountant to compute depreciation expense when fixed assets are reported on a historical cost
basis. Last reason is the objective. Other alternative measurement methodologies are less objective
than historical cost. Current cost and selling price, for example, are less susceptible to manipulation.
It also protects against financial fraud. It's possible that management intends to inflate assets while
understating liabilities. Because the process of revaluation is quite subjective, market revaluation
can be an excellent opportunity. It necessitates the use of judgement and assumptions. However,
they are unable to do so due to historical costs.