Importance Of Cost Accounting

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In particular, financial practitioners from the business community and public accounting firms are opposing the idea of using current value accounting as they felt that historical cost accounting is more practical and reliable. They have points to support their argument. They argue that historical cost is relevant to make economic decisions. Since business managers have to make decisions concerning future commitments for the company, they will need information on past transactions to weight out whether their decision is good or risky. The information of these transactions are recorded in historical cost as it reflect the actual cost involved in the transaction and thus are able to review any errors. For example if a company purchase an asset…show more content…
Objectivity is, however, relative even under conventional historical accounting with its myriad allocation technique. This mean that under historical cost, a record of the actual transaction is made so that the evidence to support the figure in the financial statement is provided and observable. For example, when a company purchase an asset at RM 1 million, the transaction is recorded in the balance sheet by debiting the asset and crediting bank. Therefore, there is supporting record of the amounts paid in the financial statements. Current cost is objective for those market price are easy to obtain.However, for non-current assets, current cost involve more complex issue.For example, for the assets which market price are unavailable, appraisal, calculation of reproduction cost and use of index number will be…show more content…
This profit or loss measure reflect the true actual inflow or outflow of money. For example, assets purchased at RM 1 million is sold for RM 1.5 million thus company record a profit of RM 500,000. This reflect the monetary gain of seling the assets and monetary measure form the basis of any business. In contrary if using the current value accounting method, for example the asset bought at RM 1 million is now valued at RM 2 million and sold for RM 1.5 million, this would result in a loss of RM 500,000. Using this method, it does not show the actual physical inflow and outflow of money. In other words, using historical cost it record the gain or loss only when it is realized which is easier to understand. Advocate for historical cost argue that the main concern from the equity holders is about their investment in the firm. The funds invested have been contributed in the firm operation such as purchase assets or paying expense, thus historical cost is logical ‘price aggregate’ to use for stewardship purpose and consider to be objectively determinable. On the other hand, historical cost accounting enable the accountant to determine the cost of assets which should be allocated to income statement and which should be remained in balance sheet by keeping track of flow of assets as the cost of assets is attached to goods and service when

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